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Succession Planning | MBO

Management Buyouts: The future for IFA succession planning

To this date, more than a third of our facilities have been provided to enable Management Buy Outs (MBOs). Witnessing the success of these deals has been very fulfilling for us, and we believe MBOs are a great way for owners to exit in a way that suits them. Selling to key members of the firm allows owners to control the exit process, ensures continuity of the business (to the benefit of clients and staff), and promotes a fair, commercial valuation without engaging in long-lasting corporate negotiations. However, these deals need to be planned and executed with some conviction. As a provider of capital to these deals, we have worked with owners to ensure a well-executed sale to their key team can be funded, and the results have been tremendous.

Our view of MBO’s is that they involve two broad steps to successful completion. Step one is to get the key individuals to become minority shareholders. This is done on commercial terms that might slightly favour the successor(s), to encourage their participation. This first step can be funded and is one that requires close co-operation with the founder. The right team must demonstrate willingness to behave like owners before considering a purchase of control from the founder. This collaboration allows the founder to engage in a mentoring relationship with their successor(s) and retain control until they are comfortable that the stage is set for their exit, in step two.

Once the minority management shareholders have demonstrated that they are a safe set of hands, having grown the business to the benefit of all, and are deemed ready for control, the founder will then execute step two of the deal by selling the remaining shares to them at a good commercial value. If all has gone according to plan, the business is significantly more profitable now than it was at stage one!

The two-step process allows a lender to phase the debt in safely, allowing management to accrete shares and enabling the founder to mentor his team to success. Importantly, it allows the founders to control their exit terms and timing. In an environment of trust and co-operation, we believe MBOs enable a smooth transition in a simple deal. We encourage such deals and so we have put together an MBO guide, to share what we have learnt from our experience with successful deals. You can access it on our resources page of our website, here.

Matthew Marais

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