There are various exit options available to business owners depending upon their key priorities, the sector in which they operate, and the size of the company. With the lasting effects of Covid-19 reshaping the mergers and acquisitions market, a management buyout may be an option worth considering.
What is a management buyout?
A management buyout (MBO) is the process by which the management team of a company buys out the existing owners, acquiring an equity stake in the business. Although the structure of an MBO can vary considerably depending upon the size and complexity of the business, one common way to achieve this is through each member of the management team acquiring a shareholding in a new holding company (Newco), which will itself acquire part or all of the issued share capital of the company from its current shareholders.
Advantages of an MBO
An MBO can be a good structure to adopt when the current shareholders are looking to retire and would like to provide the current management team an opportunity to take part in the future growth and development of the business. It allows the management team to benefit from the rewards and control gained from being business owners rather than employees.
One clear advantage is that there is no need to go through the lengthy, and often difficult, process of finding a suitable buyer. The buyers would have an existing understanding of the operations of the company and, supported by the sellers where necessary, can ensure the continuity of the business operations. If sellers wish to phase their exit, it is also possible to tailor the structure of the deal to give the sellers a longer-term exit strategy through the issue of consideration shares in the new company (Newco).
Given a management team’s pre-existing knowledge of the business, adopting an MBO structure can also minimise the time and cost burden of due diligence and disclosure in comparison to an arm’s length transaction.
Drawbacks of an MBO
Although the management team may have extensive experience in managing a business, they are likely to be much less experienced in owning a business. The sellers will need to give some consideration as to whether they have a suitable team in place to buy and manage the business.
Often the management team will not have sufficient financial backing to buy the business outright. Additional finance will therefore have to come from a range of sources. Introducing external investors or extra debt is likely to impact the dynamics of the running of the company. In addition, if the seller retains some form of equity stake in the business, this will need to be carefully considered in the drafting of the legal documents.
Financing options
There are several financing options available to fund an MBO.
Although part of the purchase price can be funded by the individual members of the management team being required to make some form of personal investment, it is unusual for a management team to have sufficient funds to purchase a company on their own. Alternatively, the purchase price could be funded by the use of loan notes, debt finance, equity finance, the issue of consideration shares or a combination of these methods.
An MBO requires commitment from both the sellers and the management team. However, it can be an effective way of ensuring a smooth and positive succession. Our Corporate & Commercial Team have a breadth of experience advising management teams and exiting shareholders on the terms, structure and implications of key transaction documents to ensure a positive outcome for all involved.
For more information and to find out how we can help you, please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.