Management Buy-Ins: The Experience Funders Want

In a management buyout, the people who already run the business buy it. In a management buy-in, an outside manager or team buys it and takes over. Between the two sits the buy-in management buyout, usually called a BIMBO, where existing managers and an experienced outsider buy the business together. Funders often favour a buy-in element, and a buy-in team has to work harder than an insider team to prove itself and to understand what it is buying.

Why funders want an outsider

Funders back people. When they look at a buyout, they ask whether the team can run the business without the owner who is leaving. Sometimes the honest answer is not yet. The reasons are usually familiar:

• A gap at the top. The existing managers are strong in operations or sales but have never run a whole business, managed a bank relationship or reported to a board.
• No finance lead. Many owner-managed businesses rely on the owner and an external accountant for financial control. A funder will want someone who can produce reliable management accounts and forecasts.
• A change of direction. If the business needs to move into new markets, new sectors or a turnaround, the funder may want someone who has done that before.
• No obvious successor. In some businesses there is no internal team able or willing to buy at all.

A BIMBO can solve these problems while keeping the knowledge of the existing managers. A pure buy-in suits businesses where there is no internal team to work with. For a fuller comparison of the routes, see MBO vs MBI vs trade sale.

How a buy-in team proves itself

An outsider has no track record inside the business, so the evidence has to come from elsewhere.

Relevant experience. Funders want to see that the incoming manager has run something similar: a business of comparable size, in a related sector, facing similar problems. Experience in a large corporate counts for something, but running a small business with limited resources is a different job, and funders know it.

A specific plan. A general claim that you will improve the business carries little weight. A buy-in team should be able to explain what it will change in the first year and why, backed by numbers. Our piece on the first 90 days of a turnaround covers the kind of early priorities funders expect to see.

Personal commitment. Funders expect the team to invest its own money. The amount matters less than the fact that it is significant to the individuals involved.

A team that fits. In a BIMBO, funders will look closely at how the incoming and existing managers will work together. Clear roles, agreed in writing before completion, matter a great deal. Disagreements about who decides what are a common source of trouble after the deal.

The extra diligence a buy-in needs

An insider team knows where the problems are. A buy-in team does not, and the seller knows more than the buyer. That puts more weight on due diligence.

• Financial. Check the quality of earnings, not just the reported profit. Look at how the debtor and creditor books have been managed, whether stock is valued properly, and whether there are costs the owner has been carrying personally or not charging.
• Commercial. Speak to the main customers if the seller will allow it. Check how much of the business depends on a few accounts, on personal relationships with the owner, or on contracts that can be ended at short notice. Some contracts contain change of control clauses that need the customer's agreement.
• Operational. Walk the shop floor. Check the condition of plant, the maintenance records, the state of tooling and the skills of the people. Find out who holds the knowledge that is not written down.
• Quality and approvals. In aerospace and defence, approvals and certifications such as AS9100 are essential to trading. Check they are current, review recent audit findings, and confirm whether any customer approvals depend on named individuals or need to be renewed. Our guide on preparing for an AS9100 audit shows what auditors look at.
• People. Understand the employment terms, any disputes, and how the workforce is likely to react to new leadership.

Legal and tax diligence belongs with your lawyers and accountants. Their work on warranties and indemnities matters more in a buy-in, because those are your main protection against things the seller knew and you did not.

After completion

A buy-in team starts with less goodwill than an insider team. Staff, customers and suppliers will be watching. The early months are best spent listening, keeping the people who hold the knowledge, and making a small number of clear changes rather than many at once.

We help buy-in and BIMBO teams build the plan, test the business through diligence, negotiate price and raise finance through our finance sector network. Read more about our management buyout and buy-in services or get in touch.