Is MBO a good succession plan for companies?

In times of COVID-19, the search for business succession often takes a back seat to the question of securing a company’s existence in the German SME sector (Nachfolgereport, DIHK, 2020). However, the short-term postponement of planned business transfers reinforces the long-term increase in the number of old entrepreneurs seeking business succession (Nachfolgereport, DIHK, 2019). Especially in family businesses, the succession process plays a central role, as it often takes place simultaneously and disruptively on two levels – the owner level and the management level.

Intra-family successions are failing more and more often

The IfM Bonn assumes that 53 percent of company successions are settled within the family. This requires, on the one hand, the willingness of a family member to succeed the company management and, on the other hand, the professional competence of the potential new entrepreneur. However, the interest of the so-called Generation Y in seeking their own educational and professional path within their parents’ company is steadily declining (Nachfolge-Monitoring Mittelstand, KfW, 2020). Thus, the family-internal takeover often fails due to the lack of professional qualifications of the offspring, who have not acquired them due to other interests.

Strategic investors often bring unrest into the company

The sale to a competitor or a group of companies is the logical consequence if there is no succession within the family. The IfM Bonn assumes that 29 percent of company successions are settled by external takeovers. The possibility of expanding the market position or strengthening the service portfolio through an external acquisition can be an attractive option for strategic investors. However, the encounter between seller and suitable buyer, in combination with the agreement on a purchase price satisfactory to both sides, represents a major challenge here. In addition, the takeover by a strategic investor often has a disruptive effect at the operational level, as the existing management is often replaced or can no longer act freely.

This is how MBO succession works

A silent change of ownership by taking over the existing management offers a suitable alternative. The IfM Bonn assumes that 18 percent of succession arrangements take place within the company. In a so-called management buy-out (MBO), the existing management acquires ownership of the company and ensures continuity in operations. Often, the existing management does not have sufficient capital to finance the entire purchase price and therefore joins forces with a financial investor. The existing management’s knowledge of the market and the company enables it to implement measures which it was previously unable to do due to a lack of financial resources.

These are the advantages of a management buy-out

In the current market environment, an MBO as a succession solution can offer the attractive opportunity of a company handover while retaining its identity. Despite the withdrawal of the previous entrepreneur, the existing management ensures continuity in day-to-day operations and has the opportunity to raise the company to a new level of growth with the resources of a financial investor. At the transaction level, an MBO has two key advantages: On the one hand, the due diligence phase can be carried out in a much leaner form, and on the other hand, the outflow of confidential information from the company is prevented. Thus, the existing relationship of trust between management and the company enables a significant reduction in costs and risk. The transfer of the company can take place more quickly and with less effort.