Management buy outs

One of the big advantages of a Management Buy Out is that, because the existing management or some of them buy out the current owners, relations are typically good and there is already detailed knowledge of the business. This means a Management Buy Out transaction can often proceed more quickly and smoothly than an arm’s length sale of a business to a third party.

The structures for an MBO are flexible. With this flexibility comes a degree of expertise needed to navigate the deal to completion and handle the paperwork involved. To make the transaction proceed quickly and smoothly, it is essential to have practical, proactive, highly commercial legal support involved.

If you need lawyers for an MBO transaction, please do give us a call.

How an MBO works and structure

• Routinely, a company is set up, known as NewCo, to purchase the shares/assets of the existing company.
• Following purchase, the shares in the NewCo are held by the MBO team (and any investors). NewCo is incorporated to enable the management team to acquire debt finance for NewCo’s acquisition of the existing business, if required.
• The underlying business remains the same, with the existing management team remaining employed. An equity investor in NewCo may well become involved in the management of the company and, where this happens this is referred to as a “BIMBO” (Buy in and Management Buy Out).
• Often the consideration the owners receive on sale is funded in whole or in part from the revenue the business generates post-MBO on deferred payment terms sometimes linked to earn-out targets. We have also dealt with MBOs that are funded via the use of EMI options.

How is an MBO financed?

Typically, a MBO is financed in the same way as any other business purchase. Where external finance is needed, obtaining and satisfying the requirements of lenders or new investors tends to be the more difficult part of the transaction. Many MBO transactions are financed by a mixture of cash, debt and equity.

However, it is not uncommon for the MBO to be financed by the seller, i.e. the owner of the existing company. This is called vendor financing. Vendor financing can take many shapes including :

• Leaving the consideration for the shares outstanding – whilst the consideration is outstanding, the vendor should consider the protections available under a shareholders’ agreement.
• Using EMI options – under which the management team can acquire shares in the business over time, as and when they have the funds to do so.
• Loans by the vendor to the MBO company – the vendor may provide NewCo with the funds, via a loan, for the purchase of the target company’s shares or assets.

Key issues

• Warranties- we work with the MBO team to fine tune appropriate warranties for the particular deal.
• Indemnities  - common liabilities may include outstanding tax claims or any expected damages to be paid as a result of ongoing litigation.
• Restrictive covenants - the MBO team will almost certainly want to restrict competition from the current owners. Agreeing restrictions is a balancing exercise.
• Share incentives - it is fairly common for the new MBO team to put in place equity incentives for the key staff. At the stage of planning the equity structure, a provision can be made for a pool of shares to be made available for employee share plans. EMI options will be the most popular but there are other choices if EMI is not suitable. We can advise on the most appropriate structure and deal with the implementation.