In its most basic form, an MBO entails the management team of a company pooling their resources to acquire all or a portion of the company they run. The majority of the time, the management team assumes complete control and ownership, utilising their experience to expand and advance the company. An MBO may offer a vendor an attractive alternative to sale to trade for a variety of reasons; for instance, the number of potential trade buyers may be limited, the vendors may be apprehensive about approaching competitors and disclosing sensitive information, or they may be adamant that the company and its employees continue to operate independently in what they consider to be “safe hands.” In this article, how does MBO work we take a look at the process and mechanism involved.
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What distinguishes a management buyout from a management buy-in?
It is essential to differentiate between a management buyout (MBO) and a management buy-in (MBI). An MBO is the acquisition of a company by its current management team. In contrast, a management buyout (MBI) occurs when a team from outside the company acquires the required funds to purchase the business and assumes control of it.
The primary advantage of an MBO over an MBI is that the management team planning the acquisition is familiar with the business and can ensure operational continuity without a transitional phase.
What are the advantages of a management buyout (MBO)?
The option of a management buyout might provide a variety of benefits to a business undergoing a change in ownership. Primarily, it facilitates a smooth transfer of ownership because the new owners are already familiar with the business. Due to this familiarity, the likelihood of future failure is diminished. Employees are less likely to be anxious, and current customers and commercial partners are reassured that “business as usual” would continue.
Importantly, internal changes and the transfer of duties between vendors and management stay private, while any required due diligence by funders is typically completed promptly.
Considering the possible future performance of the organisation, the quality of the management is a crucial consideration. Therefore, investors pay great attention to the management team’s talents, experience, knowledge, and trustworthiness, as well as their vision for the company’s future. Another consideration is the reorganisation of the MBO team’s roles. They will transition from employees to owners, which requires a mental shift. This transition is analogous to a successful football player leaving the starting line-up to become the manager. Former teammates will no longer view him as a peer, but as their superior. This can occasionally lead to friction.
What are the disadvantages of a Management Buyout?
From the seller’s standpoint, one disadvantage of an MBO is that MBO teams are rarely self-financed and, even with bank and private equity backing, cannot typically afford to pay a premium price for the company. In addition, they will not acquire the company due to a substantial strategic match (this can sometimes mean a Company commands a premium on a trade sale). In addition, there is a significant shift in the connection between the owner and the possible MBO team, as well as the associated negative risk if a deal goes badly or fails to close.
How does an MBO work?
Each MBO is different with some having a gestation period of a few years, particularly if new MBO team members need to be recruited and become proven before the MBO team can initiate the process.
It can sometimes be a difficult first step for a potential MBO team to raise the idea with owners, and vice versa. Generally, it is a good idea for the MBO team to have at least expressions of interest from funders before raising the issue with the current owners. The MBO process can take around 6 months, about the same as for a trade sale, so the vendors and management team must be prepared to fully commit to the transaction for that time frame. This can be challenging since the company must be run as normal and kept on track while the transaction is on-going
Each of the following stages are usually required:
- Management buyout team to appoint their solicitors and other key advisers
- Buyer and seller agree on a sale price. This could include an independent valuation.
- The management team assesses the amount they are able to invest.
- Detailed financial analysis conducted, including building a forecast financial model to show the serviceability of debt and returns to potential investors.
- Preparation of information memorandum by lead adviser
- Discussions with potential Private Equity (PE) providers and Bank backers
- Selection of Private Equity provider and Bank
- Agreement of detailed heads of agreement with Seller, PE and Bank
- Begin due diligence
- Prepare investment agreements and share purchase agreements
- Due diligence/disclosure process
- Agreement of MBO team contracts and share options
- Completion
What is the key to a successful MBO?
- A company with has consistently been profitable
- Good future prospects for the company without high risk factors
- A strong committed management team with a mix of suitable skills to drive the company forward
- A vendor who is willing to explore a sale to the management team and who will accept a realistic price
- A deal structure that can be funded and supported by the future cashflows of the company.
How are MBOs funded?
It is uncommon for a management team to have the cash to acquire a firm on their own, so financing is frequently required to successfully balance the goals of all parties. These are typical sources of financing:
Asset finance – Funding that enables firms to leverage on the company’s assets, typically property, stocks, or creditors, can be a very attractive option for asset-rich companies seeking MBO;
In addition to asset financing, banks will frequently consider offering a cash-flow term loan, repayable over three to five years, to support an MBO. Private debt funds are becoming far more active on the market than traditional lenders.
Private Equity (PE) – PE funds will concentrate on supporting strong management teams. If the growth potential, underlying earnings, team, and business are solid, it is feasible to fund an MBO using private equity. PE funds can provide extra benefits beyond capital to assist in the professionalisation of management, the filling of gaps, and the expansion of a business.
Loan notes from vendors – Frequently, sellers are required to assist finance the transition by leaving a portion of their consideration in the company as loan notes to be returned over time.
How we can help
We have a proven track record of helping clients deal with the process involved in management buy-outs. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of an MBO. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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