Types of company transfer: MBO, MBI, IPO, sale

The company transfer method varies hugely according to the aims defined by the buyer and the seller. Here is an overview of the main options. 

Management buy-out (MBO)

An management buy-out is the takeover of the company by managerial staff outside the entrepreneur's family circle, but already forming part of the company. This solution draws on the know-how and experience of the company’s managerial staff who take over its management. This may prove essential when the company operates in sectors where contacts and relationships play a crucial role. An MBO requires significant financial resources from the buyers and, therefore, a company with sufficient cash flow and ability to make profits to repay the takeover investment.

  • Advantages. Since the new owners come from the company's management, a certain continuity in business, strategy and know-how specific to the company is guaranteed. The opportunity to become owners for those managerial staff taking this step rewards commitment over many years and presumes, on their part, motivation in the face of any challenge. The entrepreneur, meanwhile, will be reassured to know that confidentiality will be maintained and the company will be in the hands of experienced employees who they know well.
  • Disadvantages. Successors risk taking on too much debt to finance the takeover and thus jeopardizing the company’s accounts. Since the transaction takes place between employees and owner, hierarchical links may disrupt negotiations. Not to mention disputes which may arise between the new owners. For the entrepreneur, they must expect to get a lower sale price than expected, bearing in mind the probably limited resources of successors. 

Management buy-in (MBI)

A management buy-in is the takeover of the company by one or more managers outside the family and company framework. The right choice of successor is crucial here for the success of the company transfer. The owner needs to make sure that they have the capacities necessary to take over the company, and pay attention to their experience in company management, their technical knowledge but also their personal relations. They also need to make sure that the buyer or buyers are trustworthy.

  • Advantages. For the buyer, an MBI can represent a unique opportunity to deploy their managerial abilities, whilst saving themselves the work involved in starting a business from scratch with all the constraints that this entails. If the new owner or owners are qualified and trustworthy, the entrepreneur will be reassured to see their old business prosper under its new management.
  • Disadvantages. Unlike an MBO, transfer of knowledge is not assured in the case of an MBI. The new entrepreneur must familiarize themselves with the know-how and culture specific to the company that they are buying. They must also win the confidence of their new employees, for whom they are an unknown. The entrepreneur and their family on their part must expect a lower sale price, as in the case of an MBO. 

Acquisition of an interest or takeover by a financial investor

One or more financial investors, private or institutional, take a minority or majority financial interest in the company. Most of the time, this solution is temporary, for example in order to fund an MBO or an MBI or in the case of preparation for an Initial Public Offering (IPO). The choice of investor is crucial in an environment that often favors short-term returns.

  • Advantages. The investor or investors often have know-how and contacts from which the company can benefit.  A capital contribution can allow investments that have been deferred for some time and an improvement in the company’s liquidity. On its part, the investor can make substantial profits in the case of a company valuation.
  • Disadvantages. Financial investors are usually interested in prompt returns and may prefer measures and management focused solely on short-term profits. Some investors are looking for companies in difficulty that they can sell on after intense restructuring. The owner will therefore need to be particularly vigilant regarding the provenance and aims of investors. 

Initial public offering (IPO)

The company launches itself on the stock market and accesses the capital market, which improves its liquidity and diversifies its shareholding. The company acquires greater renown and borrows more easily. An IPO is only possible for companies with a certain profile, presenting strong prospects for growth and arousing the interest of the public and financial circles. An initial public offering also entails major changes to the company structure. The question of the role of the entrepreneur and their family once the company has been floated on the stock market must be specified in detail during preparation of the IPO.

  • Advantages. If entry on the stock market is successful, the company’s equity increases substantially, which facilitates its investment and debt capacities. Opening up the capital means wider media coverage and higher prestige for the company, which becomes more attractive to employees. For example, employees can be remunerated by a share in the capital. The entrepreneur and their family may keep control of the company provided they keep the majority of votes at the general meeting and have good representation on the board of directors. And, lastly, the contribution in liquid assets resulting from the initial public offering simplifies succession questions, providing family shareholders with the option of getting rid of their interest in the company by selling their shares.
  • Disadvantages. An IPO changes the company structure dramatically. It requires meticulous and complex preparation, along with professionalism on the part of management, which will now be exposed to criticism from the public and the media and must get to grips with new tasks, such as press conferences, the publication of quarterly reports, etc. Significant expenses need to be considered, both for drastic compliance before the IPO as well as for the company's new obligations after the IPO. Since preparation of an IPO can take several years, it must be started early enough and the services of a specialist business bank must be used. Lastly, floating on the stock market obviously exposes the company to the risks inherent in a speculative market, hostile takeover bids by competitors, etc. As for the entrepreneur and their family, they run the risk of losing their influence once and for all over the running of the company or of no longer recognizing the company they have seen grow and prosper.

Sale to another company

The company is sold to another company, in principle, a competitor operating in the same sector. The owner may hope to get a good price, provided they optimize the profitability of the company beforehand and correctly estimate its value, using experts if necessary.

  • Advantages. For the buyer, this may be a unique opportunity to pick up its competitor’s know-how, infrastructures, employees and customers. For the entrepreneur and their family, this solution may prove particularly profitable if the buyer is a company with significant resources, prepared to raise the price to pick up the company’s assets or if the presence of several potential buyers allows bids.
  • Disadvantages. If the valuation of the company is not handled properly, either party may feel shortchanged. Integration of the old company’s employees into the new structure is not always optimal and may end up with their resignation, which hugely devalues the actual value of the company taken over. And, lastly, the buyer may not achieve the expected returns and synergies.

Merger with another company

The company merges with another company, in principle, a competitor operating in the same sector. Unlike a sale, the merger is not the result of a deed of sale, but of a pooling of assets through an exchange of interests. So there is no capital contribution for the entrepreneur and their family, who on the contrary see their influence reduce in proportion to their loss of interest in the company. This solution can, however, make it possible to resolve the issues raised by succession, if no buyer within the family or potential buyer is found. Since the interest in the new company’s capital is proportionate to the respective value of the companies before merger, it is appropriate to determine this value as carefully as possible. The legal provisions on mergers provide a legislative framework for the transaction, which must be strictly observed.

  • Advantages. The merger of two compatible companies usually results in a reduction in costs due to the synergy effect and in an increase in turnover. The entrepreneur may then hope to see their assets grow.
  • Disadvantages. As in the case of an ordinary sale, the pooling of resources sometimes does not result in the expected synergies. Sometimes, the parties underestimate the difficulties arising from the integration of different company cultures, potential conflicts between new colleagues, etc. Also, there is a strong chance that one of the parties will lose its majority shareholder status and therefore control of the company resulting from the merger.

Family succession

For detailed information about family succession, see the section devoted to this subject.

Liquidation

The commercial activity ceases and the company is deleted from the trade register. In some scenarios (no successor, unfavorable economic climate, low economic value of the company), this option, painful though it may be, is the only possible solution. For more information about liquidation:

Source: UBS Outlook


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Last modification 10.08.2018

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