Director/Management buyout

Director or management buyouts is the acquisition of a business by the management team. This type of buyout means that the current managers of the business acquire the shareholding of the company from the current owner.  

Management buyouts happen for a variety of reasons, the most common being that the owners of the business now have different goals or wish to pursue an alternate opportunity or even retire. Where this is the case, and the company is currently being managed by a team other than the owner (who is not really involved in the management of the business), this can be an appealing route to change ownership. It can also be attractive to a parent company that wishes to sell part of its business to the management team.  

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What is a director buyout?  

A director buyout, also known as a management buyout, involves directors of a company purchasing the assets and operations of the business they manage. This will result in the directors becoming the owners of the business as opposed to being employees. The size of the buyout will depend on the size and complexity of the business, but it can occur in any industry with any size business.  

The elements of a typical buyout are: 

• Acquisition 

• Equity 

• Debt 

How will the buyout be funded? 

Management often funds the buyout with a portion of their own capital, known as equity capital, which helps ensure they are committed to the business and its growth.  

Another option is that the buyout comes from debt finance, which is provided by banks or another type of financial institution.   

WHAT ARE THE BENEFITS OF A DIRECTOR BUYOUT? 

• The management team know the business, and this reassure the current owner that the business will be taken over by those who have already showed commitment to the business and its growth 

• The management team understands the customers and staff, which will give them an advantage in making sure they are successful moving forward 

• It is a good option for smaller business that may not attract a third-party buyer  

• It will likely be easier to agree on a value for the business as all parties involved will know the business well. Both sides know the challenges facing the business so this should help in achieving a valuation 

• The buyout process is often faster than a sale of a business to a third party   

• Generally, the risks of selling the business this way are lower, particularly since the opportunities and relevant market are known by the buyer 

• The sale of the business can be kept confidential 

• There is no need to disclose confidential information to a third party 

WHAT ARE THE NEGATIVES OF A DIRECTOR BUYOUT? 

• The directors have experience at managing the business, but different skills are required when owning the business, which they may find hard to adapt to 

• If the directors are using their own funds towards the buyout then there is a risk associated with this if the business does not succeed.  

• If for any reason the director buyout was unable to proceed, this could impact the relationship between management and the owner of the business 

When done correctly, a director buyout can provide liquidity to the existing shareholders while allowing the management team to take ownership of the business that they work hard to manage. It can be a win-win for all parties involved and ensure future success of the business.