Excellent experience start to finish – always very responsive to any queries and the turnaround on the property I was buying was very quick, even in the busy time leading up to stamp duty deadline. Jenny was always very helpful and went above and beyond to close on a short timescale.
Lauren Sever* – Associate Solicitor in our Corporate, Commercial & Employment team – discusses MBOs.
What is a management buyout?
A management buyout (MBO) is the process in which a company’s senior employees/ management team purchases a controlling interest in the company they manage from the existing owners.
What are the benefits of a management buyout?
Exit Strategy for Owners
An MBO typically serves as a robust succession plan for private owners considering retirement or a career change. They can secure a reasonable price for the company on terms that are preferable to them, avoid disclosing confidential information to competitors and feel reassured their legacy can continue by leaving their company in familiar hands who understand the company’s culture and ethos.
For the management team, this is an opportunity to fight off competition from rivals (who are looking for a trade purchase) and may be the most accessible/affordable way to gain control of the company which they may have been managing for some time. Already dealing with the day-to-day running of the company, they are in a strong position to ensure job continuity for most employees and continue to grow the company.
The key factors will usually be the price payable, the structure of the payment of that price (i.e. whether any is to be deferred) and whether there will be a clean break or some continued involvement from the exiting owner during the early transitional stage.
Alternatively, an MBO could be used to enable a company to sell a division of its operations to loyal and skilled members of the management team who can hit the ground running on day one.
Following the MBO, both companies can streamline operational expenses and increase profitability as separate entities. This may also empower them to acquire insurance, pool resources and secure financing on better terms.
How to do a management buyout
The MBO process can take several months, depending on the negotiations involved and the source of funding. The key element in the success of the MBO is ensuring that the management team understand why the traction will be of benefit to them and what, if any, changes will take place as a result. While the transaction is ongoing, the owner and the management team must be prepared to fully commit to the transaction and keep suppliers, customers and employees functioning as normal.
How does a management buyout work?
An MBO can be structured in a multitude of ways to give effect to the needs of the existing owner and the purchasing management team. As the parties are familiar with one another they will generally be in a strong position to agree on the rudimental aspects of the transaction before enlisting the help of accountants/and legal advisers to negotiate the commercial details of the transaction.
Solicitors will need to be instructed to negotiate, draft and advise on the various legal documents involved in the process and assist in the smooth departure of the owner(s) from the company. Accountants will often need to be involved to implement the most tax effective structure for the proposed buyout and analyse the financials.
An MBO will often require substantial financing (given that the management team may be unlikely to have the adequate funds to complete the acquisition themselves), which can be secured via assets finance, private debt and/or private equity. The buyer’s solicitor will frequently be required to advise on the contractual documents provided by the lender to secure the MBO.
The nature of the MBO is such that the buyers will already have a detailed working knowledge of the company therefore the lengthy commercial due diligence can be expedited. However, it’s crucial to instruct an experienced legal team who can understand the unique and commercially sensitive aspects of the company, the proposed transaction and advise accordingly.
*This piece was co-authored by Jessica Ojei‑Agwaziam
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