A management buy-out (MBO) is a transaction where the owner of a Company sells some or all of the shares in that Company to a new Company that has been set up by the management team. The process will have been paid for by the management team, private equity investor(s) and a bank.
A sale to the existing management team may be preferred to a trade sale for a number of reasons. For example, there may not be many trade buyers who would be interested in the company, the vendors may be nervous about approaching competitors and disclosing sensitive information or they may feel that the company is more likely to prosper if the new owners already know the business well. In this article, management buyout structure, we take a look at the process and mechanism involved.
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What are the advantages of a management buyout (MBO)?
For a company undergoing a change in ownership, the option of a management buyout can offer a number of advantages. Primarily, it allows for a smooth transition of ownership as the new owners are familiar with the company. Because of this familiarity, there is a reduced risk of failure going forward. Employees are less likely to be concerned and existing clients and trading partners are reassured it will be “business as usual”.
Crucially, the internal changes and transfer of responsibilities between the vendors and management remain confidential, while any due diligence required by funders is usually dealt with quickly.
The strength of the management is a critical factor in contemplating the potential future success of the company. Therefore, any funders pay close attention to the skills, experience, knowledge and credibility of the management team as well as their vision for taking the company forward. Another consideration is the change in roles of the MBO team. They will no longer be employees but will become owners which will require a change in mindset. This change in roles is akin to a successful footballer leaving the first team to become the manager. He will no longer be looked upon by his former team mates as a peer but as their boss. This can sometimes cause friction.
What are the disadvantages of a Management Buyout?
One downside of an MBO from a seller’s perspective is that MBO teams are rarely self-financed and, even with bank and private equity backing, cannot usually afford to pay a premium price for the Company. Additionally, they won’t be buying the Company due to a significant strategic fit (this can sometimes mean a Company commands a premium on a trade sale). There is also the important shift in the relationship between an owner and the potential MBO team, and the related downside risk if a deal goes badly or fails to complete.
Management Buyout Structure
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
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 we can help
We have a proven track record of helping clients deal with a management buyout. We will guide you through the process 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 a management buyout. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
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.