Management buy-outs (MBOs) are becoming an increasingly effective exit mechanism, with owners putting the business in the control of a trusted management team. Although a trade sale may realise more money, owners are often concerned about a trade purchaser dismantling the work force. Other advantages include:

  • Increased probability of successful completion
  • Less time consuming sale process
  • Rewards key employees

Key requirements for an MBO are:

  • A competent management team, with a track record of delivering profits and growth
  • Realistic vendor price expectations
  • A credible business plan and forecast model

An MBO is often structured by forming a new company to acquire the shares of the existing company. The MBO team normally invests the equivalent of one to two years’ salary, with the balance of funding usually being provided by the following:

Asset Based Lenders (ABLs)

Asset based lenders (ABL's) typically provide funding against assets, including stock, debtors, plant and machinery and freehold property. Debt is secured and, as such, tends to be cheaper than private equity and vendor debt. Facilities will usually come in two forms:

  • a revolving facility, similar to bank overdraft, with availability changing daily as debtors and stock levels vary; and
  • a term loan based upon the professional valuation of a company's assets.

Private Equity

Private equity firms will usually take a mixture of debt and equity and look to realise their equity investment within three to five years. A clear growth and exit plan is therefore required. Management teams are often concerned by the level of control which may be exerted by a private equity partner. Private equity board representation can, however, bring new a wealth of expertise to business, to include valuable contacts.

Vendor Finance

Vendor financing structures vary considerably; some leave part of the consideration in the company as a vendor loan, while others take a minority equity stake in the MBO company, as well as providing vendor debt.

How can we help?

The role of a corporate finance adviser is critical, not only because of their experience in raising finance, but also in structuring such transactions.

In terms of specific matters, these are as follows:

  • Evaluation of the financials to determine the possible funding routes to be adopted.
  • Preparation of a business plan and forecast projections, having regard to key sensitivities within the projections and consideration of how these may impact on the business.
  • Discussions with the Management Team as to the negotiation stance to be adopted in terms of the offer.
  • Preparation of an Offer Letter and Heads of Agreement, including a period of exclusivity.
  • Initial and on-going discussion and negotiation with the vendor with regard to not only the price, but also the structure of the proposed transaction, to include tax considerations.
  • Considerations relating to an appropriate private equity partner, having regard to strategy, sector experience, track record and investment style.
  • Approaches and negotiations with debt and equity providers, including terms of equity, management participation, etc.
  • Attendance at meetings with the Management Team to give presentations to potential providers of finance.
  • Compare and comment on the merits of finance offers received (debt and equity providers), having regard to leverage, covenants and pricing. Managing the process to successful receipt of funding.
  • Acting as an interface with the providers of financial due diligence.
  • Advice and assistance in relation to the legal contracts that will ultimately be required, to include the Sale and Purchase Agreement, the form and content of a Shareholders’ Agreement, advice on warranties, etc.
  • Advice on the personal tax positions of the Management Team.
  • Advice and assistance with the formation of a new company to act as the investment vehicle in order to effect the buy-out.
  • Advising on the classes of shares that the Management Team should have and the rights that these should have so that tax benefits can be achieved in the future.
  • Discussing with the Management Team the involvement of other individuals in the transaction and how to tie these people into the company for the future, e.g. share option schemes.

We will work with you through all relevant stages, from initial vendor discussions through to completion.

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