Management Buy-Outs can be the best way of maintaining links with a subsidiary, and can ensure the co-operation of management if a disposal is inevitable. However, there are a lot of problems in the management buy-out process.
Required:
Explain FOUR problems associated with Management Buy-Outs. (4 marks)
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- Difficulties in deciding on a fair price to be paid.
- If the company was sold because it was struggling there could be a lot of work involved in turning it into a successful business. The probability of a successful management buyout will depend on the reason why it was struggling.
- Tax and legal complications.
- The management team may not have the money to buy the company and it may be difficult to secure a loan to buy the business especially if the business is struggling. To secure loans to buy the company the management team may have to provide personal guarantees or remortgage their own properties/homes.
- The success of the buyout is dependant on the strength, skills and vision of the management team buying it. If the business was struggling due to the competence of the current management team is unlikely to improve if the current management team continue to lead it after the management buy-out.
- The loss of key employees if the company moves geographically, or wage rates are decreased too far, or employment conditions are unacceptable in other ways.
- If the business was doing well due to the current owners after the management buy- out the new owners will need to devise a strategy to deal with the departure of the current owners.
- Accepting the board representation requirement that many sources of funds will insist upon.
- Maintaining continuity of relationships with suppliers and customers. (Any 4 points)