What Is A Management Buyout?


A management buy-out (MBO) is a transaction in which the owner of a company sells some or all of its shares to a new company established by the company’s management team. The management team, private equity investor(s), and a bank will have covered the cost of the process.

A sale to the current management team may be favoured over a trade sale for a variety of reasons. For instance, there may not be a large number of trade buyers interested in the company, the suppliers may be hesitant to approach competitors and provide sensitive information, or they may believe that the company is more likely to succeed if the new owners are already familiar with the business.

This article explains what a management buyout is and examines the process and mechanism involved.

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For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of a management buyout, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you. 

What are the benefits 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.

When assessing 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 will need a mindset change. This transition is analogous to a successful football player leaving the starting lineup 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 draw backs of a Management Buyout?

One disadvantage of an MBO from a seller’s standpoint 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. In addition, they won’t be buying 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 fails or fails to close. If an MBO does not continue, the vendor’s connection with their management team could be harmed, which could have negative long-term effects on the organisation. Although the management team may be exceptionally accomplished in their respective roles, they may struggle with the variety of abilities required to be a “company owner.”

How does the Management Buyout process 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.

Are there any other key elements to consider when structuring a MBO?

The exact nature of a management buyout will vary from business to business. However, there are a few key points to consider, and these can include:

  • Research the feasibility of the transaction before you invest time and money into it.
  • Be open and transparent with executives and shareholders.
  • Consider giving some equity to key employees to motivate them or stop them from leaving. This should form part a plan to keep employees and customers.
  • Ensure you have conducted a thorough analysis of the value of the business and also ensure your finances are in place.
  • Keep calm throughout negotiations. It is imperative that there are open channels of communication.
  • Make sure your shareholders agreement is watertight.
  • Keep the buyout low key until the deal is signed.
  • Don’t neglect the operations of the business while working on any potential deal.

How we can help

We have a proven track record of helping clients deal with the process involved of a management buyout. 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 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.

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