A Management Buyout (MBO) is a change of company ownership where the company’s current management (or part of it) acquires all or a large part of the ownership of the company from the current owner. A Management Buyout will often occur when an owner wants to retire, they can also occur where a holding or parent company wishes to dispose of a non-core business. One of the main attractions of a Management Buyout is that there is no need to find an external buyer. Other advantages for the owner are that the process is more controlled, costs are usually less than a transaction involving a sale to a trade buyer and the buyer already knows the business very well (so limited due diligence is needed).
When To Instruct Advisors
It is important that professional advisors are selected and engaged at an early stage, because if the Management Buyout team spend too much time on it then the underlying business can suffer. They need to be able to rely on experienced and proactive advisors to drive the deal forward and take as much of the burden as possible off the Management Buyout team.
Management Buyout Funding
Funding will be a key part of the Management Buyout and typically this will involve management equity (typically 6/12 months’ salary), bank funding, private equity (who would usually look to exit and realise value within 5 years) and seller deferred consideration (whereby the seller agrees to accept part of the price over a period of time post MBO often in the form of loan notes). This then raises the question of what, if any, meaningful security can be provided in respect of the sums still owing and how that ranks in priority to payments due to the bank and any private equity investor.
Earn-outs can also appear in Management Buyout transactions, with the purchase price potentially increasing and future payments becoming due to the seller depending on the performance of the business in the 1-3 years post MBO.
Talk to Tollers
Our specialist knowledge of the structure, financing and process of Management Buyout’s means we can ensure the timetable is met and the transaction proceeds smoothly and efficiently.