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Internal Succession

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Internal Succession

Posted 09 Mar 16 by Matt Swan

Following on from our blog/article on identifying the appropriate exit alternatives, we highlight the issue that owners must evaluate the appropriateness of the management team, or new recruits to acquire and operate the business.

Owners need to understand the following factors to adequately assess the capacity of management to complete the MBO:

  • the candidates past performance in the position, which may include providing the candidates with opportunities to prove themselves;. 
  • experience/tenure does not guarantee success in the role, some employees are best suited to remain in their existing roles;
  • The "4 C's" are critical to ensure success of the succession arrangement:
    • Chemistry to maintain staff and customer relationships;
    • Capacity to fulfil the role;
    • Culture – whether the MBO candidate fits the existing culture of staff and clients ; and
    • Continuity of relationships.

To assist management to step up into ownership roles it is recommended that managers and owners work together to establish development plans for managers, ensure managers are mentored and identify how and shortcomings can be addressed (via recruitment etc).

As the management already knows the business this can result in a reduced level of due diligence being required and a smoother transition into new ownership compared to in the event where the business is acquired by a third party. The downside of an MBO can be that the consideration from an internal buyer is potentially less than that would be received, likely to be staged, and/or require a level of vendor finance.

If you think your management team has the capability and desire to complete an MBO and the owners and/or management would like to discuss the potential of a management buy-out in further detail please contact Matt Swan or another member of our Corporate Finance team by clicking the button below.

This article is part 4 of a 7 part series. Click here to read the previous part: Successor Selection.


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