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In its simplest form, an MBO involves a company’s management team combining resources to acquire all or part of the company they manage. Most of the time, the management team takes full control and ownership, using their expertise to grow the company and drive it forward.
An MBO may offer a vendor an attractive alternative to sale to trade for a variety of reasons; for example, the number of potential trade buyers may be limited, the vendors may be nervous about approaching competitors and disclosing sensitive information, or they may feel strongly that the company and its staff carry on independently in what they believe to be “safe hands”.
In considering an MBO, a number of considerations need to be made, such as the desire and credibility of the management team buying the company, the availability of funding and whether all parties involved can agree upon the funding mix. If all the boxes can be ticked, the MBO route can provide a vendor with the assurance of their company’s future success and the management team with a significant opportunity to benefit from future successes.
The hallmarks of a business that would facilitate a successful MBO are:
For a company undergoing a change in ownership, the management buyout route offers advantages to all concerned. Most obviously, it allows for a smooth transition of ownership. In addition, since the new owners know the company, there is a reduced risk of failure going forward. Other employees are less likely to be concerned, and existing clients and trading partners are reassured it will be “business as usual”. Furthermore, the internal changes and transfer of responsibilities between the vendors and management remain confidential, while any due diligence required by funders is often handled quickly.
The strength of the management is a critical factor in contemplating the potential future success of the company. Therefore, any funders pay close attention to the skills, experience, knowledge and credibility of the management team as well as their vision for taking the company forward. And while the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial, and all parties need to ensure this is a transition that is achievable.
It is rare that a management team will have sufficient funds on their own to buy the company, and so finance is often needed to successfully balance what all parties are trying to achieve. Typical sources of finance include:
Our established relationships across debt and equity providers mean we are then well placed to design MBO structures that work for all parties and introduce and negotiate the right financiers on the right terms to support the next stage of the business’ growth.
Depending on the proposed MBO structure and funding, there can be various different tax consequences that both vendor and the purchasing management team will need to understand and, as required, put in place appropriate solutions for. Some examples of key variables that may need to be considered are:
The earlier you seek tax advice in your MBO process, the better it is, as it avoids undue delays further down the line and minimises potential tax burdens for all parties involved in the transaction. In addition, we work collaboratively with our tax team to ensure that the consequences of any decisions made as part of the wider transaction are weaved into the entire process and planned accordingly.
Speak to us for more information or to see how we could help.
A further key component of the MBO process issue determining the purchase price and/or valuation of the target business. The typical valuation methodologies for UK companies are also applicable to MBOs. Our team have extensive valuation experience and can provide both sides with a well-researched and evidenced guide to what fair value should be, why, and in what scenarios the buyers can increase the valuation for when they sell in time.
Beyond valuation, it is also important to understand the deal structure in regard to the timing of payments to the seller and if there are any conditions on performance related to future payments.
To support management, we will typically assist them with:
These factors will all be considered when calculating an appropriate valuation for the business. In addition, it will ensure the affordability of the intended capital structure for the incumbent management team after the MBO is completed.
The key steps of a management buyout process include:
The MBO process can take several months, so the vendors and management team must be prepared to fully commit to the transaction for that time frame. This can be challenging since the company must be run as normal and kept on track while the transaction is ongoing.
If you would like further information and to see how we could help, contact us on the form below.
“Price Bailey’s advice and support proved invaluable in getting this long-awaited MBO across the line. Their input in early feasibility stages, seeking an appropriate funding structure, taxation advice and project managing through to completion, in conjunction with our legal advisers, made a huge difference to the process and eventual outcome for the management team.”
Managing Director – Glazing Vision
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