Management Buy-Outs Legal advice and representation from our expert solicitors in Milton Keynes.

Why do an MBO – the Owner’s perspective?

It may be that the owner or founder has tried to sell the company or business in the open market. They may have been previously disappointed or there may be no obvious buyer. On the other hand many sellers have a personal or moral wish to pass on the business to loyal managers who understand the business and can protect the heritage of the business.

The current owners may prefer to carry out a partial sale in order to assist a long-term transition. This method enables a much smoother hand over of control which both releases funds for the current owners but leaves the current owners able to continue to take an active, and guiding, interest in the business.

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Why do an MBO – the managers’ perspective?

From the managers' perspective an MBO may be attractive because the managers have an inside track and uniquely understand the business. This inside knowledge reduces the risk as compared with an open market purchase of an unknown or little known business. Those managers may have new ideas and extra energy which they can use to enhance a business they are already committed to.

In addition, their relationship with the owners will typically allow them to obtain more favourable payment terms than would be available for a full trade sale.

Instructing a legal team

Get advice early on. The corporate team at Heald Solicitors in Milton Keynes have a detailed understanding of the process involved in structuring and implementing an MBO. It may be that preliminary arrangements such as formation of the buying vehicle and obtaining tax clearance are required and these steps can take time and need to be started early. In addition legal advice should be obtained at the heads of terms stage; arrangements made on a “hand-shake” can be very difficult to change later on.

Your legal team will also know what other experts to involve in the deal. Buying a company is a team game – you can rely on Heald to work collaboratively with every member of the team and guide your through the process. Heald can also suggest accountants and financial advisors to help you with the process.

Heald can either act for the management team or the Sellers.

How is the MBO funded?

Vendor finance

This is jargon for the sellers waiting for their money – it is often nothing more sophisticated than that. If the sellers, relying on their trust of their former managers, are willing to wait for some of their payments this enables the MBO team to drip-feed manageable amounts of consideration to the former owners from the income of the target company thereby smoothing out the payments and helping cashflow.

In more complicated cases the seller may agree to make an explicit loan back of sale proceeds.

Management finance

In addition to vendor finance an MBO team will usually be expected to come up with funds from two sources. Firstly they will be required to put some of their own money into the deal. This may be a relatively modest amount. Typically employees, even well-paid ones, are not of the age where they have accumulated sufficient capital to make a purchase; however they will need to make some kind of personal financial commitment.

Secondly the MBO team may borrow funds from an external funder. It would be usual for the funder to take security over the target company or its income. This arrangement can be complicated and is often a source of delay. Heald can advise the MBO team on the documentation required for this.

Structures

The MBO team will almost certainly form a new entity to buy the shares from the current owners. There may be some restructuring required including getting accountancy and tax advice and possibly a tax clearance from HMRC for the transaction. The new company will end up being a holding company for the trading business with the MBO team owning shares in the holding company. In this structure the target business is able to provide funds to the new holding company which then, as the buyer, can pay the previous owners.

It is vital to make sure that the new management team have entered a shareholders’ agreement to govern their relationships in the new holding company. Heald are experts in shareholder agreements and can advise and guide the new management team.

Employee Ownership Trusts (ETO)

A more complex version of employee ownership is an ETO. This is a separate topic but in essence involves creating a trust company to represent all employees. This is run on a commercial basis but enables ownership to be spread across the full body of employees. The existing managers will play a key role in the transaction nonetheless and may be willing to consider this as an alternative to a traditional MBO.

Documentation

In addition to any documentation associated with the new structure the MBO team will also put forward a share purchase agreement or business purchase agreement to buy the interests of the current owners. A number of issues will arise the most significant of which are:

Warranties

The MBO team have inside knowledge so it may be that the seller is unwilling to provide warranties about the history of the company. Certainly the managers will have an intimate knowledge of their field of activity. However be aware that there may be “blind spots” or areas of ignorance especially in the areas of finance which may have been jealously controlled by the previous owners. Expert advice on which areas to focus on is needed in these cases.

Payment terms

A very careful balance between the interests of the sellers and the interest of the management team will need to be struck. The sellers will want to receive as much money as possible up front whilst the management team will want to preserve as much revenue as possible to reduce the risks of failure. Typically, the target company or business will provide cash from its normal business revenue to enable the MBO team to fund the purchase. The holding company structure referred to above is used to enable the sellers to be paid over a number of months or years.

Security

For the reasons set out above it is highly unlikely that the whole price can be paid in one go. The use of an instalment payment plan creates risk for the current owners who may well seek some security for example over the assets of the target company. If the MBO team have sought external funding there is likely to be competition for security. Heald can advise the owners or the management as necessary.