Three reasons why management buy outs can fail – and what to do about it

MBOs are a great way of selling an SME and simultaneously rewarding those who have worked hard to make it successful. They are also an exit route for business owners who operate in highly niche sectors where there may not be many buyers.

In order to consider an MBO, the business needs to able to function smoothly without the existing owner and clients need to have confidence their needs will be met without the founder of the business at the helm. There has to be at least one experienced and capable manager that wants to step up to the role of CEO and the business needs to have sufficient financial resources to sustain a period of transition and pay the necessary legal fees.

The theory of an MBO is straight forward; the owner transfers shares and receives an initial payment in the form of cash on completion, fixed payments over time and variable payments subject to the future performance of the business. The new owners agree to operate within certain budgetary restraints and provide ongoing management information to the former owners. Should payments not be met legal contracts are put in place to enable ownership of the business to revert back to the previous owners.

Such is the theory. In practice there are huge emotional hurdles to be overcome. The stakes are high and previous experience of such deals, on both sides is rare. These are exactly the conditions into which the ego loves to step in and cause havoc. Limiting beliefs get exposed and, if not dealt with, disaster can ensue.

Lawyers Incite Suspicion

Solicitors are an unfortunate necessity when drafting an MBO; it is important to have sufficient checks and balances in place if things do not work out. Such controls need to be established from a place of openness, mutual understanding, and compassion but unfortunately many solicitors unnerve everyone with their ‘what if’ questions. They present both parties with disaster scenarios that are unlikely to happen, but once voiced, arouse uncertainty and suspicion.

The way to minimise this is to agree as much of the deal in advance as possible and it pays to hire an MBO specialist; a good one will exercise equanimity in advising both parties.

Letting Go Prompts Fear

Having built a business from scratch and suffered all the knocks and sleepless nights that come with making a business successful, when faced with the actuality of ‘letting go’ the exiting owner can feel threatened.

Such fears are not logical. In our rational mind we know it’s time to move on but the absolute finality of no longer having a role and not going into the office can cause the exiting owner to panic internally. Questions arise such as ‘who am I now?’ and ‘what is my value in the world?’ It is at this moment that our ego mind will invent excuses for backing out of the deal.

The way to minimise this is to have clear defined projects to move onto once the MBO is complete. In my own case I wrote my book ‘The Spiritual Route to Entrepreneurial Success – From Harassed Sole Trader to Visionary CEO’.

Not All Managers Make CEOs

It takes time to transition from being a competent manager to becoming a visionary CEO and some never make it. One reason is that the skill sets are different. Managers can be excellent motivators and administrators, efficient at installing and adhering to systems, but may be risk averse and lack vision. They do not automatically have the intuitive wisdom and innate trust in themselves to handle difficult and entirely new situations. They may blame outside circumstances and other people when things go wrong, rather than asking themselves what they need to learn from what is happening.

The way to minimise this is for the new CEO to hire a suitable business coach who can help them clear their negative egoic thought patterns and let go of their limiting beliefs.

John Reynard successfully sold his a market research company via an MBO and is now a business coach.