MBO: Buying a Company as an Executive

Handeling an MBO: Buying a company as an executive

As an executive in a company, such as its manager or director, you might think that the owners of your company would want to sell it to a third party instead of to you. On the other hand, there are a series of reasons that make it more logical for them to choose you for an MBO (management buy-out).

“A bird in the hand is worth two in the bush.” – Spanish proverb

Why the business owner would rather sell to one of its executives (MBO)

The first reason is the confidentiality. This way, they do not publicize the sale of the company and can avoid unnecessary gossip from the competition. If an executive of the company is considering purchasing it, he or she will not play games because they know that their job is on the line.

On a different note, the executive knows what he or she is buying and will find less risk than an outsider. This will make the company more valuable to the executive (he or she is familiar with the company being bought so will discount less for risk).

Similarly, because the executive knows the company well, he or she will not have to do a very exhaustive due diligence, so the process could be much quicker.

When the buyer is that company’s executive, there is much less risk of the operation falling through due to misunderstandings because there tends to be knowledge and trust between the parties and will thus be able to find a way to reach an agreement. The business owner saves him or herself the arduous process of looking for, convincing, negotiating, and selling to an outsider.

The executive gives a guarantee of continuity for the company that outside buyers do not. The employees, suppliers, customers, and banks know the executive.

Therefore, even though the process is competitive, executives have more advantages because they better understand the value of the company and the maximum price that should be paid for it. The other potential buyers know this, and if there are business executives who are also contenders for the purchase, they tend to pull out from the process.

Managing the conflict

In an MBO, there is an inherent conflict since you are both the buyer and the manager/director.

The best way to deal with this problem is by being professional and working on the purchase outside of your business hours.

Another conflict is the price, your natural interest would be to buy it at the lowest price possible. However, you are taking a lot of risk; your job and the purchase are both on the line. Therefore, I recommend that you be careful not to let yourself be overtaken by greed, that you establish a fair price, and that you back it up with facts and data.

If you see any point of conflict, openly show it to the seller and create ways to find solutions. This way, you will have the confidence to find ways to fight the problems that may arise in the negotiations.

This article was written by Enrique Quemada – President of ONEtoONE Corporate Finance

Your might also be interested in “THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY”.

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