A management buyout (MBO) is a form of acquisition where managers acquire a large part or all of their company from either its parent or from private owners.
Management and leveraged buyouts became common in the 1980s, originating in the US and crossing first to the UK and then the rest of Europe. MBOs are similar in all major legal aspects to any other company acquisition, but the particular nature of the MBO lies in the position of the buyers as managers of the company who want to get the financial reward for its future development more directly than if they were to remain employees only.
Often, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give anything but the most basic warranties to the management, on the basis that the management know more about the company than the sellers do.
An MBO can also be attractive for the seller as they can be assured that the future stand-alone company will have a dedicated management team in place. This may also be a positive factor if the buyout is supported by a private equity fund, encouraging an attractive price.
The venture capital industry has played a major role in the development of buyouts in Europe, especially involving smaller deals in the UK. Here are 10 top tips for individuals thinking of conducting an MBO:
. Enlist the help of a team of professionals from the outset - solicitors, accountants and financial advisers. Ensuring you receive guidance from the start of the transaction will put you in a stronger position and prevent potential mistakes from occurring.
. Develop an idea as to what type of finance you need - this will usually be debt finance, equity finance or both. Your advisers will help you figure out what is required, and this will form a framework within which to work.
. Ensure the MBO doesn’t become a distraction from your usual line of work within the business. Preparing for an MBO will take time and effort, but try to keep this separate from your everyday role. You don’t want the business taking a hit when you are trying to source funders and, ultimately, you need to continue complying with any director’s duties imposed on you by law. Sections 171 to 177 of the Companies Act 2006 include various duties, including the duty to promote the success of the company and the duty to exercise reasonable care, skill and diligence. Simultaneously, you should be looking to create a more valuable company so that you can sell the concept of the MBO to any potential funders and be a part of that success in the future. It is essential to strike the balance between the company’s interests and your own, but your professional advisers will be there to assist.
. Create shareholders’ agreements with the help of your solicitor. Although the MBO is a positive step forward, it is essential to prepare for difficulties further down the line, and shareholders’ agreements will provide solutions to ‘what if’ questions. Think of a shareholder’s agreement as the business equivalent of a marriage pre-nup.
. Set a time-frame within which to complete various stages of the MBO so you have an idea of what you are working towards. At the same time, don’t be unrealistic - MBOs can require a lot of meetings, discussions, drafting and negotiating - they do not happen overnight.
. Preparation is key. MBOs can cause upheaval to a business, so it is crucial that the owners prepare with the MBO team to ensure a smooth transition. Identify the right people with the right skills to lead various aspects of the buyout, and make sure the whole team knows the business, its customers and its suppliers inside out.
. Ensure the structure of the MBO and the business is well thought-out. Will the management team purchase the business as individuals, along with the input of funders? Or will the individuals form a new limited company which will then buy the shares in the business? If it is the latter, solicitors and accountants should be involved in the new company formation and filing requirements at Companies House.
. Consider what warranties and indemnities are required by different parties, because it may not be as simple as having only the management team and current business owners involved: third-party funders may play a part. Generally, warranties and indemnities between the first two parties will be relatively straightforward because the management team will already be involved in the business, so should know it in significant detail. However, the third-party funders will probably ask for more robust warranties and indemnities as they are new to the operation and won’t want to risk their investment.
. Prepare your accounts accurately - funders will want to know exactly what they are contributing to. As importantly, prepare three-to-five-year forecasts to present the funders with a detailed idea of the growth opportunities and their return on investment.
. Get a confidentiality agreement (also known as a non-disclosure agreement or an NDA) in place from the get-go. The owners of the business will not want potential funders obtaining access to confidential information, then inappropriately sharing it with third parties. Before the management team meet with potential funders and/or advisers, they will no doubt be required to pass on an NDA from the business owners to the interested parties for signing.
By Brett Cooper
. Brett Cooper is the head of corporate at Backhouse Jones solicitors. Contact at 01254 828300 or brett.cooper@backhouses.co.uk
