Management Buyouts (MBOs) are often seen as a straightforward way for management to make decent gains from an existing business, within a relatively short timescale, and under a favourable tax regime. However they are also full of risk, particularly where there are conflicting considerations to take into account in relation to the business and the demands of the departing owners.
An MBO can be structured as either a sale of the business as a going concern, or alternatively as a share sale. The appropriate structure will generally be determined by tax and accounting considerations. The management team should take tax advice on the transaction structure at an early stage. You should consult your corporate solicitor in relation to transaction structures.
The management team will need to consider progressing negotiations, and any matters relating to the MBO, on a confidential basis. It is important that there are no “leaks” to other staff members, or to any customers and suppliers of the business. Any leak will almost certainly lead to rumours, which could destabilise the business, and therefore have an impact on the viability of the business going forward, and therefore the success of the MBO. It might be appropriate to have meetings offsite.
Since the management team will generally be actively involved in the running of the business, the owners may demand a more streamlined due diligence exercise, since most aspects of the business should already be known to the management team. Any due diligence should also be conducted on a confidential basis and where possible without alerting employees and customers.
A sale to the management team has a number of perceived advantages from the owner's perspective which include:
1. The existing management team know and understand the business, and in certain instances they may already be key to the running of the business. Therefore the sellers will generally demand streamlined due diligence, and also a lower burden of warranty protection for the buyer and consequently a lower burden in relation to the ongoing liabilities for the seller.
2. A corporate MBO avoids the potentially damaging disclosure of sensitive business information to trade competitors.
3. In certain instances the MBO can be structured such that any deferred consideration can be paid from the profits of the company or dividends of the shareholders, which may mean that the MBO teams do not have to obtain significant external funding.
4. The MBO may be structured such that the sellers do not have to work for the business for any earn-out or deferred consideration repayment period.
5. Given the corporate management team's familiarity with the business, the seller will often expect the management team to accept a greater degree of business risk than perhaps other prospective buyers would be prepared to accept and so obtain a cleaner break (and perhaps even a higher price).
6. Management can also exert pressure on the seller, particularly in the negotiation process or where the seller is attempting to sell the target business or company to other prospective buyers, as a seller may be reluctant to sell against management's wishes. The seller's wish to have management "on-side" can be a trump card in management's hands if they want an MBO to happen.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester
