MBOs Part 3 – Funding
Quite often, a management team will not be in a position to finance a transaction themselves; lending in one guise or another will therefore be a common feature of a deal; the question will be what form should that take; on one particular deal, we had to cover not just bank funding, but also borrowing against the company’s invoices, smaller investors that had agreed to put in private funds and even a sale and lease-back of assets with a commercial lender, to help raise sufficient cash to do the deal!
Where outside finance is obtained, each financier may well rely on their own legal advice, to ensure their own interests are fully protected; the number of advisors can therefore rapidly increase, requiring efficient project management, particularly if the deal is to be completed within a challenging timetable.
Funding will usually be provided to a new vehicle (often a new holding company) set up to acquire the trading target; this ensures a cleaner structure but will often not avoid the need for detailed due diligence, to ensure key assets are in place and that liabilities are understood and not onerous. Commercial warranties are often not a feature of an MBO, given the management team’s usually intimate knowledge of the target business.
More recently deals have, to a larger extent, been self-funded, either with financial assistance from the target company itself (with funding lent up to the purchaser, allowing it to acquire the shares in the main trading company); in private companies this is now much simpler than before, without the previous requirements of the Companies Act relating to financial assistance; where that had to be approved through what was known as the whitewash procedure.
Many deals are also now contingent, so far as price is concerned. Earn-outs and similar mechanisms can be popular, mitigating some of the MBO team’s risk, particularly if the on-going success of the business post-completion is not what they may have anticipated during earlier negotiations. Structuring deferred payments through loan notes is often an attractive proposition where all of the consideration due for the shares cannot be paid at the outset; for the seller(s) transferring a proportion of the price into loan notes, allowing some tax mitigation can prove attractive, in addition to the prospect of receiving payments over a longer period (as an effective replacement for prior income) can be a welcome outcome, for both sides.
If you have any questions about or require any advice on Management Buy-outs, please do not hesitate to contact our dedicated team on 01935 385963.