Management Buyouts in 2023: Thriving in a High-Interest, Low-Liquidity Environment

Management buyouts (MBOs) have been a prominent strategy in the corporate world for many years. In 2023, we have seen a resurgence of MBOs, driven by a unique set of circumstances; high interest rates and low liquidity.

A management buyout occurs when a company's existing management team, often with external financial support, purchases the business from its current owners. MBOs can offer various advantages, such as increased control, alignment of interests, and a closer relationship between management and ownership.

MBO trends in 2023

Attractive investment opportunities

MBOs have gained momentum in 2023 due to a combination of factors. One of the primary catalysts is the availability of attractive investment opportunities created by businesses facing financial distress or underperformance. This has spurred management teams to explore MBOs as a means to take control of the situation and effect positive change.

Existing management teams who may have delayed retirement due to disruption due to COVID-19 are also now re-visiting their plans.

High interest rates

The prevailing high-interest-rate environment in 2023 is paradoxically a favourable factor for MBOs. While high interest rates can seem prohibitive for financing, they also present opportunities.

Interest rates impact the cost of debt, and with prudent financial structuring, MBOs can harness this environment to secure financing at historically low valuations. Furthermore, with the availability of seller financing, by deferring all of a substantial element of the consider means that where external financing is prohibitively expensive or unavailable, seller financing can fill this void.

Low liquidity

The dearth of liquidity, characterised by limited available capital and cautious investor sentiment, has made it challenging for traditional buyers and private equity firms to make investments.

MBOs can thrive in this climate as management teams are often intimately familiar with their business' strengths and weaknesses, instilling confidence among investors.

Benefits of MBOs in this Environment

Inside knowledge

Management teams leading MBOs are intimately familiar with the companies they are acquiring. This insider knowledge enables them to identify areas for improvement and implement strategic changes efficiently. Their expertise helps mitigate the risks associated with taking over a business.

Aligning interests

MBOs align the interests of the management team and the company's success more closely than other acquisition strategies. This alignment creates an environment where the management team is highly motivated to enhance the company's performance, which is especially crucial in a challenging financial environment.

Operational efficiency prioritised

MBOs often prioritise operational efficiency as a core component of their strategy. They can swiftly implement cost-saving measures and streamline processes, which is vital in a high-interest, low-liquidity environment where businesses need to operate as efficiently as possible.

Creative finance structures

In a high-interest-rate environment, MBOs can creatively structure their financing. They may use a combination of equity, debt, and seller financing to optimise their capital structure, allowing them to take advantage of low valuations while still managing their interest payments.

Focusing on long-term value

MBOs tend to be oriented toward the long-term value of the business rather than short-term profit. This approach can be appealing to investors who are seeking stability and growth in uncertain times, as it minimises the risk of short-term financial manoeuvres that can harm the company's prospects.

Cost effective and efficient

Given the internal nature of the parties involved in an MBO, they can often be completed more cheaply and with less delay than with an external purchaser.

MBOs are experiencing a resurgence in 2023, driven by high-interest rates and low liquidity. This unique financial climate has created opportunities for management teams to take control of distressed or underperforming businesses. MBOs offer several advantages, including strong insider knowledge, alignment of interests, operational efficiencies, flexibility in financing, and a focus on long-term value.

As the financial landscape continues to evolve, MBOs are expected to remain a viable and advantageous strategy for management teams looking to unlock the potential of their companies in challenging times. In the face of high interest rates and low liquidity, the adaptability and expertise of MBOs can be a beacon of stability and growth in an uncertain economic environment.

For further information on how we can support you with MBOs, click here, or, alternatively, contact our Corporate Services team.