Why a pandemic may be the right time for a management buyout

Morton Fraser Partner Paul Geoghegan
Paul Geoghegan
19 August 2021

The COVID-19 pandemic has had a detrimental effect on mergers and acquisitions activity in Scotland, causing an increasing number of business owners to see Management Buyouts (MBOs) as a more realistic opportunity to exit their businesses.

North Sea Engineering firm, Alba Gaskets, and PR agency, Beattie Communications, are among some of the latest Scottish businesses that have recently been sold by way of an MBO.

So what's behind this growing MBO trend and will they become a more permanent fixture of the Scottish market?

The current uncertainty caused by the pandemic is deterring some buyers from making acquisitions as they choose instead to wait for greater market stability.  It has also made it more difficult for owners and buyers to agree a value for a business; buyers may feel uncomfortable proceeding with a valuation based on previous years’ activity, while an owner may feel that a lower value would be giving their business away too cheaply.

But with MBOS a growing trend, will they become a more permanent fixture of the Scottish market?

Whilst selling to a third-party buyer is often seen as the best way to maximise the price a seller receives for their business, there are a number of benefits to an owner selling to a management team. 

The management team are usually willing and reliable buyers: they are already invested in the business, they understand how it operates and its value, and are clear on how to maximise its potential. They can also help reduce the risk of disruption upon an owner's exit as they tend to be the first point of contact for key stakeholders, making it easier to maintain existing relationships.  This can be an important factor for owners, especially in circumstances where they have agreed to receive a proportion of their price at a later date or upon meeting certain targets.  A management team can often be willing to agree to tailor the structure of any deal to maximise the benefits – including tax benefits - to an owner as they have the opportunity to acquire the business without necessarily paying top dollar for it.  MBOs can therefore be an attractive exit route for an owner.

The pandemic is not the only reason why there has been a noticeable increase in the number of MBOs.  There has been an expectation that the UK Government will make certain changes to the capital gains tax regime, requiring owners to pay more tax on a sale of their business.  Whilst such changes did not transpire in the Spring 2021 budget, many believe that they will appear soon and this concern is causing owners to look at alternative methods of exiting their business 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.

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

First published in The Scotsman.


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