MBOs Part 1 – Selling the company: Is it better the Devil you know?

When it comes to selling your business, whether to move on to a new project, to divest some non-core elements of an existing business or with an intention to retire, a keen management team might prove a better prospect, via a management buy-out (MBO), than a trade sale to a competitor, particularly for the longevity of the business, going forward.

Where we are instructed to act on a MBOs, these considerations have long been made; our first call is often to help in negotiating heads of terms, particularly in relation to how a deal should be financed and structured.  In recent years, deferred or contingent elements of the price agreed have been a common feature, and these arrangements can be complex, requiring not only the correct technical advice, but a commercial approach that balances the interests of both vendor and buyer; not forgetting they already know each other well and may therefore make assumptions that are incorrect – in this situation, the stakes are unusually higher.

The MBO team’s corporate finance advisors will often recommend a proposed structure for the deal, and help to negotiate headline terms but often their biggest role will be to identify potential gaps in the business plan and/or the skill set offered by the proposed team.  There may well be gaps, particularly in areas that may have been undertaken by the selling shareholders (finance, marketing or business development, for example) that might not be in situ after the deal is complete.

Due diligence and warranties concerning the position of the business will often not feature so heavily than on a typical deal, as in some cases the MBO team’s knowledge of the company’s detailed workings will be greater than the vendors!  Where a deal is not self-financed (see Part 3 on Funding an MBO on 22nd April) we, alongside the management team’s corporate finance advisors, will work to identify those issues that do exist – any third party funder will wish to see that core due diligence has been undertaking (often around title, finance and tax) to protect against unwelcome surprises, later down the line.  Consideration of these issues will help in determining the MBO team’s strategy in moving forward, with key people in new roles, where additional support or expertise might be needed.

In the next two instalments we explore the challenges in pursuing an MBO transaction, drawing on our experience in completing MBOs efficiently, including on an international scale, and funding options, given the need to be more creative in financing deals, in recent years. Watch this space!


Posted: 08/04/2016
Categories: News