Management Buyout Process

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.

The management buyout process can often be arduous, putting a great deal of stress on management teams and individuals involved and this is often just to close the transaction. After the ink has dried, there will be no reduction in pressure. Even for well-managed and prosperous businesses, risks can be substantial. As such, a structured process will be helpful in ensuring things run as smoothly as possible.

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 advantages of a management buyout (MBO)?

The option of a management buyout may offer a variety of advantages to a corporation facing an ownership transition. Because the new owners are already familiar with the business, it primarily promotes a seamless transfer of control. This familiarity decreases the probability of future failure. Employees are less likely to feel nervous, and customers and business partners are reassured that “business as usual” will continue.

Importantly, internal changes and the transfer of responsibilities between vendors and management are kept confidential, and any required due diligence by funders is often performed promptly.

When evaluating the organization’s potential future success, the quality of its management is a critical factor. Consequently, investors pay close attention to the management team’s skills, experience, expertise, reliability, and vision for the company’s future. Another factor to consider is the reorganisation of the MBO team’s responsibilities. They will transfer from employees to owners, requiring a mental adjustment. This shift is comparable to a top football player leaving the starting lineup to become manager. Former teammates will no longer consider him a peer, but a superior. This can sometimes result in 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.”

Management Buyout process – what are the steps involved?

Some MBOs have a gestation period of several years, especially if new MBO team members must be recruited and established before the MBO team may commence the process.

It can be challenging for a potential MBO team to introduce the concept to owners, and vice versa. Before approaching the current owners, the MBO team should generally have at least expressions of interest from funders. Similar to a trade sale, the MBO procedure can take up to six months, therefore the vendors and management team must be prepared to fully commit to the transaction for the duration. This might be difficult because the business must continue to operate normally while the transaction is ongoing. going

Typically, each of the following steps is required:

• The management buyout team will select their lawyers and other essential advisors.
• Buyer and seller agree on a price for the transaction. This may involve an independent appraisal.
• The management team determines how much they can invest.
• Detailed financial analysis undertaken, including the development of a forecast financial model to demonstrate to potential investors the serviceability of debt and profits.
• Preparation of an information memorandum by the main consultant
• Preparation of an information memorandum by the main consultant

Selection of Private Equity provider and Bank

• Agreement of detailed agreement heads with Seller, PE, and Bank
• Commence due diligence;
• Prepare investment agreements and share purchase agreements;
• Commence due diligence/disclosure process;
• Conclude MBO team contracts and share options.
• Completion

What is the best way to have a successful MBO?

• Consistent profitability of the business.
• Positive outlook for the company’s future without significant risk concerns.
• A strong, committed management team with an assortment of appropriate abilities to propel the organisation ahead.
• A seller who is willing to explore a sale to the management team and who is willing to accept a reasonable price.
• A deal structure that can be supported by the company’s future cash flows.

Are there any other considerations for 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.

Authored by Ben Posted in Corporate, News Tagged as

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