Management buy-out (MBO)
A management buy-out occurs when a business – or part of a business – is sold to its existing management team. This may seem like a ‘normal’ transaction, but in fact management buy-outs have a special dynamic. The dual role of management, on the one hand representing the interests of the existing shareholders (seller) and on the other hand acting as a prospective buyer, presents specific challenges. To arrive at a fair valuation, the long-term forecasts have to be prepared and taken into consideration. Some shareholders ask their management team or financial director for support in drawing up long-term forecasts. The question is, does the management come up with realistic estimates? Or will they provide more conservative forecasts in order to reduce the price?
Valuation for management buy-outs
The valuation methods used for management buy-outs are not different from the methods used for other types of valuation. However, a critical issue in management buy-outs is the transaction’s fairness to the shareholders. That’s why it is so important that the accuracy of the forecasts is scrutinised. It may also be useful to look at more than one scenario. The same scrutiny should be extended to the management. What are the forecasts if the policy is continued under the existing shareholder structure? And what are the forecasts when the existing management team takes over ownership of the firm from its existing shareholders? Other factors besides the valuation to take into consideration in management buy-outs are the payment structure and funding mechanism (the ability of the parties to fund the required purchase at the agreed upon price).
What we do for you
We support the shareholders (seller) as well as the management (buyer) in assessing the forecasts and synthesising this information into a valuation. In addition, we act as independent expert for both parties in the management buy-out transaction, with our valuation assessment as the starting point for the negotiation. As critical sparring partner, you can rely on us to provide insight into the fair value of companies. Our reports are transparent, to the point and detailed, and give all parties in the transaction clarity on how value is measured and what principles are used. This provides a solid basis for negotiating the purchase terms and price.