Thinking about selling to your management team? PJ O’Brien, our Head of Strategic Financing, sets out what an MBO costs a seller, what it saves, and why the owner who understands the trade-offs going in gets a better deal either way.
Selling to your own management team almost never produces the biggest number on the table. A trade buyer paying for synergies, or a strategic acquirer buying market access they cannot build themselves, will usually stretch further than a management team funding a deal out of the business’s own future cash flow. That is simply arithmetic, not a criticism of either side, and any owner going into an MBO conversation expecting a trade sale price is setting themselves up for a difficult conversation later.
The other real cost is that you rarely get paid in full on day one. Because MBO debt is serviced from the company’s own profits rather than a buyer’s balance sheet, sellers routinely accept a vendor loan note or deferred consideration for part of the price. It is often the only way to bridge the gap between what the business can safely borrow and what the seller wants for it, and Irish sellers have become increasingly willing to do exactly that. The note is usually subordinated to the bank, which means that if the business struggles under new ownership, the seller waits, or loses out, before the senior lender does.
What it saves is harder to put a figure on but very real. There is no competitor trawling through your customer list and your margins under the guise of a trade sale process that might fall through anyway. There is no new owner learning the business from scratch while your best staff quietly update their CVs out of uncertainty. The team already know where the bodies are buried, good and bad, which tends to make due diligence faster and less adversarial than with an outside buyer who is discovering everything for the first time and pricing every surprise against you.
It also lets you exit in stages rather than all at once. Staying on for a defined handover, tied to an earn out you can actually trust because you know the people delivering it, is a very different experience from handing the keys to a stranger and hoping they run it the way you would have. For owners who care what happens to the business after they have gone, and most do, whatever they say publicly, that continuity is worth more than the marginal euros a trade sale might have added to the price.
Neither route is automatically right. But they are solving for different things, and the owner who understands that going in negotiates a far better version of whichever one they choose.