From manager to owner: MBOs
23rd March, 2016
A management buy-out (or 'MBO') can be an attractive option for sellers and for managers, compared to a sale to an outside buyer.
There’s an existing relationship between the parties which should help the deal process run more smoothly, management have knowledge of the business which should simplify the due diligence and warranties required, and often management is better placed than an outsider to understand how that particular business can grow.
But the success of an MBO process is not a given. At Ward Hadaway, our corporate lawyers have been involved in MBOs of all shapes, sizes and styles and we know that for a potential management team, success hinges on a number of key elements.
Finance for a management team is becoming easier to access after the restricted lending environment of the last few years. Banks, commercial lenders and private equity are all increasingly in the market, on a variety of terms.
Vendor financing (where some of the sale price payable to the owners is deferred for a period of time so it can be paid out of cash generated by the business) is also increasingly common.
Each source of finance has a different blend of pros and cons and a management team should spend the time working out which suits them best. A fair warning is that the best option will not always be the cheapest.
Any MBO process is demanding and intensive. On top of all of the usual hard work and effort involved in running the business, management must agree detailed deal terms with sellers and how they will work together as new owners in the future.
Often this latter point doesn’t get enough attention and this can lead to problems later on. Generally, the MBO transaction itself is the time to tackle any difficult conversations about levels of ownership, contribution and influence, as well as making provision for the “what if” scenarios such as someone leaving.
Tax considerations for sellers, managers and funders can often affect the structure of an MBO and these drivers should be identified early in the process.
The management team need to think hard in advance about how the business will be effectively managed following the MBO. There are dangers where a business which has previously had a clear and successful leadership structure becomes managed by a committee of owner-directors.
There can be a strong temptation, as the business makes money following an MBO, to take that money out. This could be by way of unscheduled debt repayments, dividends or increased salaries.
This may be the right decision for some businesses, but often it proves to be a brake on growth or results in there being too little available to cover any trading bumps along the way.
As a final but vital point, experienced professional advisers will help a management team get the best from their MBO process and avoid storing up problems for the future.
* This article first appeared in the Ward Hadaway Yorkshire Fastest 50 2016 supplement. To read the supplement in full, please click here.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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