Management buyouts: when management makes a move

MBO


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

Mental Health: mind matters

Trucks


The mental health of employees is as important in the workplace as their physical wellbeing. It includes an individual’s emotional, psychological and social wellbeing and influences how they handle stress.

Poor mental health can vary from feeling “down” to suffering from anxiety and depression. Usually, an individual’s mental health will fluctuate depending on the pressures they are experiencing.

The UK Department of Health advises that one in four people will at some point experience mental health issues. And almost six in 10 employees (59%) experience workplace stress.

A survey by the Chartered Institute of Personnel and Development (CIPD) revealed stress and mental ill-health were among the most common causes of long-term workplace absence. An employer’s failure to recognise mental health can be costly.

Research shows that mental ill-health costs employers in the UK £30bn each year through lost production, recruitment and absence. Employers should take steps to tackle the causes of workplace stress and actively promote positive mental health among employees.

This can be done in a variety of ways, from raising awareness, training and seminars to proactive wellbeing initiatives such as yoga classes and gym memberships. Promoting a culture of good mental health will help to minimise the risks of employment-related mental ill health and the risk of claims against the employer.

In order to combat workplace stress, employers should:

. carry out a stress audit. This could involve asking employees to list any stress-related concerns; and

. carry out an assessment of the health and safety risks employees are exposed to at work, including an assessment of work-related stress.

To show that they are committed to taking work-related stress seriously employers should implement an anti stress policy. The policy should set out, for example:

. the role and expectations of managers and supervisors to ensure the successful implementation of the policy;

. guidance on resolving cases of stress at work for both the employer and the employee; and

. any internal and external sources of support available for employees who might be suffering from stress, for example, a confidential helpline and/or an occupational health service.

Employers need to ensure the policy is properly implemented in practice by:

. training managers to recognise situations likely to cause stress, to identify symptoms of stress, and how they should manage stress and promote an appropriate culture; and

. conduct return-to-work interviews following a period of sickness absence and performance appraisals. This will help to identify any underlying stress-related work absences or performance issues.

A CIPD survey found that “less than half of respondents report that their organisation supports employees who experience mental-health problems very well or fairly well, while one in five (20%) say that their organisation supports such employees not very well or not at all. Almost three respondents in 10 (28%) don’t know how well their employer supports people who experience mental-health problems”.

Employers need to do more to ensure that employees feel supported with their mental health and should encourage open channels of communication. The arbitration service Acas suggests employers could develop action plans to help promote positive mental health.

This could include:

. the employer’s objectives in relation to mental health and why it is committed to promoting good mental health; arranging training to educate employees and managers to help remove any stigma surrounding mental ill-health;

. putting in place support mechanisms for employees experiencing mental ill-health. For example, having nominated mental health first aiders in the workplace; and
. drafting a mental health policy and reviewing existing policies to ensure employees and managers know where they can obtain support.

Managers should be trained to spot the signs of mental ill-health, including changes in an employee’s usual behaviour, changes in their standard of work, being withdrawn and showing less enthusiasm/interest in tasks and increased sickness absence. Managers should not make assumptions and should regularly ask employees about their wellbeing, and create an open and approachable environment.

Employers should identify areas of the workforce which might be a cause of mental ill-health. For example, employers should hold return-to-work interviews to identify the reason(s) for an employee’s absence.

Employers also need to consider whether or not reasonable adjustments should be provided to employees to support them during periods of mental ill-health. They should consult employees before making any adjustments to establish what support and/or changes they need.

Any adjustments should be documented and regularly reviewed. Although support mechanisms might come at a cost to the employer, in the long term they can help to reduce sickness levels, which will ultimately save on sickness pay, increase workplace productivity, and reduce the possibility of costly claims.

If an employee feels they are suffering from mental ill-health or workplace stress, they should raise this with their line manager, HR manager or somebody else within the workplace. This will give the employer a better understanding of the employee’s position, allowing any necessary adjustments to be made to support those experiencing mental ill-health or workplace stress.

What claims can an employee bring?

. Breach of contract - an employee suffering from work-related stress might argue that their employer has breached an express or implied term of their contract of employment. Additionally, the employee could have a statutory claim for constructive unfair dismissal.
. Unfair dismissal - if an employee is signed off sick from work due to stress or mental health and is subsequently dismissed, they might have a claim for unfair dismissal.

. Disability discrimination - an employee might be protected from disability discrimination if they suffer from mental ill-health issues that have a substantial adverse effect on their ability to carry out normal day-to-day activities. Anxiety and depression could fall within this definition. Whether or not an individual’s work-related stress can be regarded as a disability will be a matter for an employment tribunal to decide.

What are the signs of workplace stress?

Stress is the adverse reaction experienced in response to excessive pressures or demands. Although a certain degree of pressure can help to motivate employees and give them a sense of ambition, which in turn improves job performance and satisfaction, employers should ensure that employees do not become inundated with work.

Stress can affect an employee’s health, reduce their productivity and lead to performance issues. Although stress is not an illness, if it is sustained over a period of time it can lead to, or exacerbate, existing mental-health problems.

By Claire Brook

  • Claire Brook is an employment law partner at Aaron & Partners and can be contacted on 01244 405575 or claire.brook@aaronandpartners.com