A changing landscape: The growth of MBOs and private equity

As a result of the Covid-19 pandemic, we have seen a considerable change to how businesses are approaching mergers and acquisitions.

Business owners are starting to see Management Buy Outs (MBOs) as a more realistic exit opportunity.

The uncertainty caused by the pandemic deterred some buyers from making acquisitions as they preferred to wait for greater market stability. It also made it more difficult for owners and buyers to agree on the value of a business.

There has also been an ongoing expectation that the government will make changes to the capital gains tax regime, requiring owners to pay more tax on a sale of their business.

This is causing owners to look at alternative methods of exiting which can be achieved promptly and in as tax efficient a manner as possible. If an owner has a willing and reliable management team in place, an MBO can give the owner that desired exit.

Although bank loans tend to be the first port of call for management teams looking to fund an MBO, one of the most common sources of funding comes from Private Equity.

PE investors make most of their money on the sale of their shareholding so tend to be more focused on seeing a short-term return and don’t usually want to wait more than four or five years to sell their shares/exit the company.

This makes PE funding good for quick business growth and a fast exit of the PE investor. This is beneficial to the new management team, as the investor will help them optimise profit for the first couple of years and then leave them to get on with running the business in the long-term.

Whilst it is anticipated that growing economic stability will result in the number of more traditional third-party mergers and acquisitions returning to pre-pandemic levels, MBOs and PE funding will continue to be a viable and attractive option to some owners as they look to achieve an exit.

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