Guide To A Management Buy-Out - Introduction
A comprehensive guide to allow management teams to understand how to undertake a management buy-out
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A Management Buy-out ("MBO") is the acquisition of a company by its core management team, usually in conjunction with a combination of third party finance providers such as private equity funds, banks and debt funds.
MBOs are an excellent form of succession planning for businesses where the existing shareholders are looking to retire, but want to ensure continuity and a safe home for their business going forward.
For the management team, it provides a once in a lifetime opportunity to own the business for themselves and create value which can be crystallised through a future sale.
The process and structuring of an MBO is complex and time consuming, so the use of a specialist corporate finance advisor is strongly recommended. Eclipse has significant experience in structuring and delivering successful MBOs in a range of difference scenarios.
I hope you find this guide useful, but if you have any queries or would like to discuss how Eclipse can help you either now or in the future, please don't hesitate in contacting me.
The Parties Involved
Alignment between the management team, vendor and funders is vital to undertake a management buy-out
The management team involved in an MBO is a small group of three or four senior executives which generally includes:
The team's objectives are to agree a deal with the vendor, raise the necessary funding to complete the transaction, and ultimately to maximise their returns.
In most scenarios, the management team will not have sufficient resources to fund the purchase price themselves. Most transactions will therefore require the use of funds from a private equity house, bank, alternative debt provider, or a combination of these sources.
Prior to committing to funding a transaction, they will look to ensure that the management team is competent and that the business plan is robust and deliverable.
As with management, the key objective of these parties is to maximise the return on their funds.
As previously mentioned, an MBO provides an excellent option for vendors looking for a deliverable deal which secures the future of the business and its employees.
Whilst finding a good home for the business is clearly important, the vendor will also be looking to maximise value from the sale.
Furthermore, they will strive to minimise the warranties and indemnities provided upon sale, to reduce the risk of any future claims from the new owners.
Approaching The Vendor
Obtaining the vendor's permission to begin negotiations and seek funding is a vital step
Creating A Business Plan
A detailed business plan is essential in obtaining the necessary funding for a transaction
A range of finance options are available to fund management buy-outs
A range of different financing options currently exist within the market to meet the needs any given transaction. These include the following:
1. Bank debt: this may include bank loans, overdrafts, or invoice discount facilities and may be secured or unsecured. Pricing varies based upon the risk profile of the debt provided.
2. Private Equity ("PE"): the majority of PE funds seek to invest in established, expanding companies that can generate significant investment returns (25%+). They invest in the form of equity and loan notes (a debt instrument) and will look to be involved in the operations of the business, appointing members to the board of the company.
3. Debt funds: a range of alternative debt providers exist, providing solutions to meet a variety of different needs, including:
a) Unitranche facilities: non-amortising loans upon which only interest is paid during the term, before a final bullet payment.
b) Mezzanine facilities: unsecured debt which commands a significantly higher rate of return than senior debt and often carries warrants to subscribe for ordinary shares.
4. Vendor rollover/deferred consideration: an alternative source of finance is to utilise funds from the vendor. This could be achieved by simply deferring payment of a portion of the consideration, creating an interest accruing loan in the business, or by the vendor maintaining an equity stake going forward.
Process For Obtaining Finance
The raising of finance is a complex and time consuming process which needs to be considered carefully to obtain the best results. The key steps are as follows:
1. Selection of funders: based upon the funding requirement, selecting a group of funders which will provide the optimum capital structure is vital. A list of appropriate parties to approach should be prepared in conjunction with advisors.
2. Sharing of business plan: once NDAs are in place, sharing the business plan with funders will allow them to assess the opportunity in more detail.
3. Initial offers: these should include details such as the funding quantum, equity split, structure of investment (ordinary shares vs loan notes), fees, board constitution, good leaver/bad leaver provisions and diligence requirements. Offers should be reviewed and a shortlist of preferred funders progressed to the next stage.
4. Management presentation: once a shortlist of parties has been agreed, management will meet them in person in order to present their business plan and answer any questions from the funders.
5. Site tours: alongside the management presentations, it is also common for funders to visit the operational sites of the business at this stage. This can be done using a "cover story" in order to protect the confidentiality of the process and avoid it leaking to employees.
6. Final offers: the shortlisted funders should be asked to submit their best and final offer, following which the management team select their preferred partners.
Diligence is a time intensive process, analysing all key aspects of the business
The legal process for a management buy-out is complex, requiring a number of different documents to be negotiated
Management buy-outs often include complex funds flows at completion
DISCLAIMER: This page and the broader "Guide to a Management Buy-out" have been prepared only as a guide. No responsibility can be accepted by Eclipse Corporate Finance Limited for loss occasioned to any person acting or refraining from acting as a result of any material in this guide.