Corporate Law FAQs

Getting the best answers is important, especially when it comes to Corporate Law FAQs, Tollers experienced team provides the answers…

Management Buy Out

How are management buyouts usually funded?

Management buyouts (MBOs) are normally financed through borrowing from a bank or commercial lender.  In most MBOs, the management team doesn’t have sufficient personal funding to pay the purchase price in full at completion, and consequently, they need to borrow funds and pay the purchase price over a period of time perhaps using profits from the company (distributed to them as dividends).  The deferred payments will form a part of the structure of the transaction that may mean the sellers will be paid over a few years.

How long does a management buyout take?

I normally advise that once the price has been agreed that an MBO will take 6 – 8 weeks to complete.  As the management team is usually familiar with the operations of the company there is only limited due diligence.  However, any lender will need to be familiar with the company, and the negotiation of the documentation can take some time.

What legal documents are required for a management buyout process?

The legal documents for a management buyout process can be split into 3 main categories: the investment documents, the acquisition documents and the finance documents. The investment documents include the investment agreement, new articles of association and any loan notes or debentures.  The acquisition documents include the share purchase agreement, disclosure letter and ancillaries in respect of the share transfers.  The finance documents may include a facility letter, inter-creditor deed and debentures or guarantees.   There will also be documents required for the incorporation of the newco acquisition vehicle.

What are the benefits of management buyout?

An MBO is the purchase of a controlling share in a company by its executive directors and/or managers. The principle benefit, therefore, is the purchase will be by a group of individuals who are already involved in the business and that should allow seamless continuity for employees, customers and suppliers.

In addition, the extent of the due diligence required (one of the most time consuming aspects of a company purchase) can be restricted and, consequently, completed within a shorter time period.

Finally, depending on the funding required and the position of the seller, there may be more flexible finance arrangements that could be agreed if the seller is to fund the deal by way of extended payment arrangements or lighter security.

What is the difference between a management buyout and a leveraged buyout?

In short, not a lot as the reference to leverage is usually a way of describing the funding arrangements used in a management buy-out. It refers to the use of outside  capital by way of bank loans or other finance. The distinction being between the seller finance arrangements referred to above. In leveraged funding the lender will normally look for substantial security that could extend to personal guarantees from the management buy out team and charges over their personal assets (eg their homes).

What is the management buyout process?

A management buyout is the acquisition of a company by the management team, moving from employees to entrepreneurs. The transaction process usually begins with business owners looking for an exit strategy. Management buyouts are similar in all major legal aspects to any other acquisition. It is common for the management team to incorporate an acquisition company (“NewCo”), there will be various documents required to incorporate NewCo.

There will be pre-contract documents such as a confidentiality agreement and heads of terms. The management team will complete a due diligence exercise on the business, however, there will be less due diligence as the management team will have a good idea of what the business entails.

The preparation of the acquisition documents such as the share sale agreement is not usually as long as a normal share sale, as it is standard in a management buyout the sellers would reduce warranties and indemnities. Other acquisition documents consist of the disclosure letter and ancillary documents.

Finance documents and investment documents will also be produced, these may include a facility letter, inter-creditor deed and debentures or guarantees. The investment documents may consist of a shareholder’s investment agreement, new articles of association and any loan notes. Management buyouts are usually funded by way of private equity investment and/or debt financing. The management team may invest a proportion of their capital, funding may also be available from the bank that is already familiar with the business or the management team may seek the funds from private equity investors.

Buying and Selling Businesses

Can a buyer pull out after signing heads of terms? 

The Heads of Terms in each transaction are always different so it is difficult to generalise.

The majority of Heads of Terms that we deal with are not legally binding except for any agreed

period of exclusivity such that either party can pull out of the transaction but they will continue

to be bound by the exclusivity period.  However, there might be other issues that arise if the seller pulls out including any corporate finance broker fees that may have arisen, or the payment of an amount to the buyer if this agreed in the Heads of Terms. The parties will still have to pay any professional fees that have arisen in the transaction so far eg accounting or legal fees.  Think carefully of the consequences before you cancel a transaction.

How long will it take to sell my business? 

We normally advise 6 – 8 weeks from when we take a client on.  However, there are so many factors in a transaction that can affect the time involved such as the speed at which the parties and their advisors act, complexity, whether there are any tough negotiating points etc.  The single biggest unknown factor in a transaction is how much time is needed for due diligence.  If you are thinking about selling your business then we recommend that you start preparing it for sale about 2 years in advance.  We normally take on clients when they have found a buyer and the price has been agreed, but the legal structure has yet to be agreed.

What are heads of terms when selling my business?

The heads of terms is one of the first documents prepared on a business sale and sets out the main terms that have been agreed between the buyer and the seller.  The heads of terms are usually not intended to be legal binding (except in relation to any confidentiality, exclusivity of negotiations or costs provisions) but they provide an opportunity to agree on the key terms of the transaction before due diligence is commenced and extensive drafting is undertaken.

What do I need to find out about buyers when selling my business?

We advise sellers to undertake some due diligence on the proposed buyer when selling their business.  For example, to consider whether the buyer can afford to buy the business particularly where an element of the consideration is deferred and due to be paid a period after completion.   If the buyer is a company and is issuing shares to the seller as consideration then the seller will need to establish that the buyer has authority to issue those shares, whether any consents or waivers will be required to issue the shares and also what the value is of the shares.

What happens on completion of the sale of my business?

It is very similar to the sale of a house, in that all the necessary documentation that is needed to transfer ownership will be signed and dated and that procedure usually takes place remotely. Many sales don’t have exchange and completion stages, ie the sale is simply completed on an agreed day. So there is something of a paper chase to ensure that all the necessary documentation is signed and with the respective solicitors so that the matter can be completed.

There are also practical issues to be dealt with such as the handing over of keys/alarm codes if there is property involved, delivering trading documentation and announcing the change of ownership to staff. From the seller’s perspective, you have to be certain that no property that isn’t include in the sale is left in the property (if that is changing hands). Sometimes valuations of stock or other property take place on completion.

If no property is involved the issue is ensuring that all the assets the subject for the sale (eg laptops, mobile phones, machinery etc.) are delivered or made available to the buyer.

Will I have any responsibilities or liabilities after selling my business?

The short answer is: yes. It is very rare to complete a deal without there being contractual obligations (eg warranties and indemnities that relate to the past trading of the business) on the seller that will continue for years following completion. For general warranties (eg employees) that period would normally be for 2 or 3 years and for tax that can be 6 or 7 years. Our job, when acting for sellers, is to minimise the scope, period and amount applicable to those on-going liabilities. It is also possible that the buyer might want to underwrite those liabilities by keeping part of the price (a retention) to claim against. We also help to minimise or remove retentions so the maximum price is received at completion.

Will I have to sign any covenants or other agreements when selling my business?

Typically, a buyer of a business will usually want to prevent the seller from establishing a competitive business that could diminish the goodwill of the recently purchased business. The seller will retain business knowledge and could use this information to lure clients and old employees to their new business. A share purchase agreement usually contains restrictive covenants that prevent the seller from doing the following after completion:

  • Carry on any business which is within the same sector or competition with the target business being sold;
  • Poaching customers, suppliers or employees from the target business; and
  • Restrict the use of any intellectual property owned by the target business.
How do I form a company?

We recommend following the seven-step process as documented on the Government website (Set up a limited company: step by step – GOV.UK (www.gov.uk)).

Step 1 – Check if setting up a limited company is right for you. 

We recommend obtaining appropriate tax advice from a registered accountant to ascertain whether or not a limited company is right for yourself and your business.

Step 2 – Choose a name 

If the Registrar of Companies believes the name you have chosen is offensive or not appropriate they will reject your application. Remember to be unique, do ample research, think long term and check for the ideal domain name.

Step 3 – Choose directors and a company secretary

You must appoint a director, but it is not a requirement to appoint a company secretary.

Step 4 – Decide who the shareholders are and identify the people with significant control over the company (PSC)

There will need to be at least one shareholder, this person can also be a director. A PSC is any with voting rights or more than 25% of the shares.

Step 5 – Prepare documents agreeing on how to run the company 

The main document that will need to be prepared will be articles of association. The Company Act 2006 provides that the model articles of association will automatically apply to companies incorporated on or after 1 October 2009. The articles of association are a public document and if the shareholders would like to keep company arrangements out of the public space we would recommend a shareholder’s agreement which is a private document in addition to the articles of association.

Step 6 – Check what records you will need to keep

You will need to keep records about the company (statutory books) and financial and accounting records. It is common in practice that a professional such as an accountant would assist with the upkeep of the records of the company.

Step 7 – Register your company

The company will need to be registered at Companies House, for this you will need an official address and choose a SIC code.

If you have a question regarding Corporate Law or would like more information on the services we offere…Talk to Tollers on 01604 258558, our experienced Corporate and Commercial teams are on hand to provide you with the best possible advice and guidance.

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Our Corporate Law FAQs Experts

Duncan Nicholson
Chief Executive Officer
Duncan joined Tollers as a Partner in 2006 in order to provide specialist advice on Corporate Recovery and Insolvency matters...
Nicholas Johnson
Partner and Head of Corporate
Nicholas is a lawyer specialising in corporate, commercial, and banking and finance legal matters...
Rebecca Briam
Senior Associate Solicitor
Rebecca is a Senior Associate Solicitor in Commercial and Corporate Law.
Duncan Nicholson
Chief Executive Officer
Nicholas Johnson
Partner and Head of Corporate
Rebecca Briam
Senior Associate Solicitor
Shane Taylor
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