For many managers, a management buyout (MBO) represents a way to find personal satisfaction by controlling your own destiny. It doesn’t hurt to know that it’s also one of the quickest ways to become an entrepreneur and achieve financial success. However, just like any business venture, it doesn’t come without significant risks. To help you learn how to successfully manage a management buyout, here are the biggest mistakes you need to watch out for.

Losing Sight of Your Core Business

When it’s all said and done, buyers usually spend anywhere from 3 to 9 months on an MBO. This takes into account target prospecting, negotiating a deal, arranging the finances and paperwork which takes up additional time. During that entire period, you can get caught up in the pending business acquisition that you lose sight of how much of the internal resources it consumes from your existing business. Keep your eye on your core business at all time, while using the remainder of your resources for the buyout.

Succumbing to “Deal Fever”

“Deal fever” is just another term used to describe managers who get so emotionally tied up in the process that they start ignoring the negative aspects of the deal in front of them only to complete it quicker. As a buyer, your main focus should be making the right deal, regardless of the time, energy and resources you invest.

Weigh the “pros” and “cons” and re-evaluate the deal regularly during the MBO. If you notice something’s off, potential deal breakers that you can’t re-negotiate, it’s better to walk away than strike a deal you’ll regret later on.

Not Creating an Extensive Shareholders Agreement

A Shareholders Agreement is the most important document in a management buyout. Creating a quality Shareholders Agreement includes a discussion on all the “what if” scenarios you and your managers might encounter during your MBO. These include: what happens if someone is fired, gets sick, or dies; what are the issues that will require a majority consent from all the shareholder; how does a shareholder exit and at what value are their shares sold.

When it comes to your own Shareholders Agreement, you need to spend as much time drafting it as possible. Openly discuss every possible situation and outcome of that situation with your partners, and only include the solutions you all agree upon. At one point all these issues can become reality, so it is important to get them out of the way now to protect the security of your future business acquisition.

Not Considering All Potential Financial Partners

There are numerous financial sources that can fund an MBO: banks, term lenders, vendor financiers, private equities, or subordinated debt providers. Banks, for example, are considered the cheapest option but have a strict return policy, unlike private equities which are more lenient and more expensive.

One of the leading private equity firms in Australia suggests you consider all the financial sources available before choosing the best one for you. Identify any potential short-term problems your new business acquisition and the effects your financial backing can have on your long-term goals. This evaluation will allow you to avoid the wrong financing mix for your MBO.

Not Making Hard Decisions

Many MBO companies have a hard time growing their business because managers don’t know how to make the hardest business decisions. You need to understand that fate of your new assets rests in your hands now. You will need to make tough decisions to expand your business in order to achieve a return on your capital investment. Number-driven decisions like downsizing or further investment need to be made to expand your business. Despite technically being a part-owner of the company, you might have to fire a member of your MBO team, or step down yourself. To achieve success, you need to do whatever it takes.

Not Being Patient

Ultimately, when it comes to MBOs, you need to understand that this is a long-term investment. And just like any long-term investment, it requires patience. You can’t expect a quick ROI, even in the best-case scenario. The best thing you can do is to focus all your initial efforts into paying out your financial debt ASAP. Afterwards, you can expect some return on your capital investment, but the more you grow and invest the more you will earn. It’s just a matter of time.

Ultimately, management buyouts represent a great financial opportunity for any businessman or manager with an entrepreneurial spirit. The key is to never lose perspective and to always keep an eye on the game. Some mistakes are going to happen, but learning from them will help you and your company grow. In turn, this will allow you to reap all the financial rewards that attracted you to a management buyout when you began your journey.


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