A management buy-out (MBO) is a transaction in which a target business is transferred, in whole or in part, to its management team, usually using a new company established for the purpose (a “Newco”). The sale of a business to the management team can be advantageous to both the seller and the management team, due to the management team’s knowledge and understanding of the business. This deal structure also avoids the need to disclose sensitive and confidential information about the target business to potential third-party purchasers, who may also be direct competitors.
Finding the funds
Often, the management team cannot generate sufficient funds to finance the acquisition themselves, and need to look elsewhere for additional money. This usually involves approaching a third-party debt provider, such as a bank or a private equity provider, or both. The acquisition is often a combination of equity finance – provided by the management team and the private equity provider – and debt finance, secured on the assets of the target company.
Key to a successful management buy-out is the quality and motivation of the management team to drive a company’s success. The private equity provider will usually expect the management team to provide a substantial investment to ensure both their financial commitment and the commercial success of the venture.
Structure and investment
MBOs are often structured as a share purchase, but can also be carried out by way of a transfer of assets to Newco. The parties involved will subscribe for shares in Newco, with the rights attached to each class of share carefully negotiated. Private equity providers usually want preferential rights.
A principal document governing the rights and responsibilities of the parties is the investment agreement, which not only sets out the basis of the investment but often includes warranties given by the management team about the target business, provisions relating to leavers and step-in and enforcement rights.
When a management team is contemplating a buy-out it must ensure its actions do not breach any obligations of good faith or confidentiality owed to the target company. The team will inevitably try to get the best price possible when negotiating the purchase of the target, and this may place them in a position of conflict with their duties to the target company, its shareholders and employees to secure a higher price.
Sometimes an MBO may also require shareholders’ approval under s190 of the Companies Act 2006, where Newco buys an asset from a director or from a person connected to a director. Such considerations need to be dealt with appropriately and legally.
MBOs are effective ways of changing control but can be complex and challenging to negotiate. The Moore Barlow team has extensive knowledge and expertise in navigating the challenges and potential pitfalls of the MBO process. We can help you to reach a successful MBO completion.
To find out how Moore Barlow can support you with your management buy-out, contact our team of professionals on (+44) 023 8071 8000.