EM Law | Commercial Lawyers in Central London
What is a management buy-out?
A management buy-out (MBO) is the purchase of a company by the members of the management team. An MBO, in effect, involves three transactions: establishing the acquisition group, financing the acquisition group, and acquiring the target. Often, the management team will set up a new company as the acquisition vehicle. Funding for an MBO is usually provided by a mixture of funds from the management team, private equity and bank lending.
What is a management buy-in?
A management buy-in (MBI) is similar to an MBO but managers or a management group from outside the company will lead the acquisition. Given the lack of prior knowledge an MBI team will have about the business, the risks of an MBI are different. Due to this, an MBI team will generally conduct more thorough due diligence and expect robust warranty and indemnity protection. An MBI team may also be viewed with some scepticism by the existing employees but will usually have better sector experience than those involved in an MBO.
Funding a management buy out and buy in
The type of funding available to both MBO’s and MBI’s will depend upon the size and cash flow of the company. Usually, funding is provided by a mixture of funds from the management team, private equity and bank lending. Funds from the management team can be very important and are sometimes considered a gauge of how committed the team is to the transaction. Private equity finance may consist of buying shares and/or providing additional funding such as loans and asset-based finance. Private equity firms usually want to maximise their short-term rate of return so may include stipulations of how the company is to be run and what objectives have to be met. A bank loan is another way of financing MBO’s and MBI’s.
Smaller companies usually have fewer options than their larger or better-established counterparts. MBO’s and MBI’s tend to be funded against the assets of the business with members of the management team being expected to contribute some of the purchase price personally. However, it may still be possible to use alternative financing.
Legal advisors will be heavily involved in the drafting of the documentation required for an MBO or an MBI. There will also be several parties involved. A typical MBO or MBI will involve the management team and its lawyers, the private equity fund and its lawyers, the sellers and their lawyers, and any other finance providers and their lawyers.
In no particular order, such documentation will include:
- Heads of terms – for the acquisition and for equity.
- The sale and purchase agreement.
- Due diligence questionnaire.
- Confidentiality agreement.
- Stock transfer form.
- Board meeting minutes.
Why should I consider one?
A management team may initiate an MBO or an MBI or the circumstances of the sellers may give rise to the acquisition. An MBO or MBI may be an attractive option for a retiring owner or for a parent company who wishes to sell a part of their business.
Before considering an MBO you should make sure that you have a strong management team who you can trust. An advantage of an MBO is that the acquisition is usually a controlled process and company information can be kept within the company.
Before considering an MBI you should also consider your options carefully. Although a new management team might have better knowledge, contacts and experience, they may not be the right fit.