Management Buyouts – What to expect and how to prepare

Simon Cuerden, Head of Company and Commercial

27th October, 2015

Considering a management buyout is in many ways comparable to taking the plunge into parenthood. Usually, you’ve helped contribute to and build a successful business around you, and you’ve decided to do away with disposable income for the foreseeable future in order to nurture and develop something close to your heart. As with parenting, reasons for embarking on a management buyout can be many and varied, but the need for planning, preparation and good advice are key.

Simon Cuerden, Head of Corporate & Commercial, takes a look at how best to prepare.

Management buyouts take place when an existing business is sold by its current owner to (usually) its existing management team rather than to a trade or institutional buyer. For a business undergoing a change in ownership, a management buyout offers advantages to the parties involved. The management team already know the business, employees are less likely to be disrupted and existing customers and suppliers know the people they are dealing with.

Management buyouts are, however, surprisingly difficult transactions to complete, involving as they do, multiple parties. Simon Cuerden, Head of Corporate and Commercial at Genus Law, sets out some of the key areas to consider.

1. Choose your team wisely

It is vitally important to put the right team in place as early as possible – accountants / corporate finance advisers to advise on funding, the structure and key financial terms of the buyout and lawyers to deal with the legal side of the process, which will include all the transaction documents.

2. Structure the transaction to suit you

An essential early consideration is how the deal will be structured. A new company will be formed for the management team to carry out the buyout. You will need to consider whether the new company will buy the shares of the target from the existing owner(s) (which is typically what happens) or whether it will acquire the assets of the target? There are various considerations here which your team of advisors can advise you on.

3. How will you fund the transaction?

Funding the transaction may take a variety of forms. Bank funding in the form of loans and overdrafts is very common as is equity funding from private equity houses. Invariably management teams are required to introduce their own funds as “hurt” or “risk” money. Your professional advisers again have an important role to play here and can introduce you to potential funders and will play a vital part in helping you to secure and negotiate the best terms possible for you.

4. The Deal

Once a deal has been agreed in principle with the current owner(s), the main commercial terms of the deal should be set out in a short document called the Heads of Agreement or Heads of Terms. Most of the terms contained in this document are not legally binding (apart from those relating to, for example, confidentiality and exclusivity) but, nevertheless, they will rarely be varied from unless any major issues come out of the due diligence process and can involve a lot of negotiation before they are finally agreed.

5. Due Diligence is vital

Due Diligence is usually a very important part of any share or asset acquisition and will
typically cover financial, commercial or legal areas of the business to be acquired. In a management buyout scenario, the management team should carefully consider at an early stage what areas should be covered, paying particular attention to any areas of the business in which they have not been involved such as finances. External equity investors or debt funders may very well insist on a detailed due diligence exercise so that they are aware of any potential areas of risk in the target business before they invest or lend any money.

6. The Key Legal Documents you will need

It is crucial that you choose advisers who have the experience and skill to protect your interests in the legal documents which record the terms agreed in relation to the management buyout. They will be required to negotiate and agree the legal documents involved in the process on your behalf. These will typically include:-

• Share Purchase (or asset purchase) agreement which will include warranties and a tax covenant. There can be detailed negotiations around the scope of the warranties – if you as a management team are already actively involved in the business, the seller will want the warranties to be narrowly restricted to any areas which the management team are not involved in, which may be acceptable to you and your funders. If the Management team is (largely) external, then you will need to try and ensure that the warranties are extensive and cover all areas of the business

• Disclosure Letter – this is prepared on behalf of the Seller to disclose any facts or matters which qualify the warranties in the share purchase agreement and which would otherwise render them incorrect. Again, this can be the source of detailed negotiations between the parties and experience is key to the preparations and negotiation of it

• Bank funding documents

• Investment Agreement and bespoke Articles of Association if an equity investor is providing finance

• Shareholders Agreement between the members of the management team

• Service Agreements for the management team

Whether you are planning to embark on your first MBO, or a serial entrepreneur taking the plunge again, at Genus Law, we can help with your transaction. We offer a cost certain approach to assisting you with transactional support. Please contact or call 0113 320 4540 for more information.