If you are planning to sell your business, an increasingly attractive option is a management buyout (MBO) if you think the current management team could be interested in buying you out.
Planning well ahead will help to ensure that the MBO team is right for the deal, that your business is presented in the best possible shape so that the buyers and their funders can see value and future potential in the proposed acquisition – and that you will receive your just rewards.
‘By getting your business MBO-ready as early as possible, it is more likely that any deal will succeed, completing quickly with no hiccups,’ says Rachel Atherton, a Partner in the corporate and commercial team with Bracher Rawlins LLP.
Rachel Atherton considers how to ensure your business is fully prepared for a management buyout.
The MBO team
All management teams are unique, and the managers you have selected have been chosen due to their particular individual skills and how these skills combine as a team in the management of your business. However, managing a business is very different to owning a business – the skills required may share some characteristics, but they are not the same.
As such, it is a critical early consideration that the MBO team cannot only manage the business but whether they can unite as viable business owners and to manage financing and risk. This requires a consideration as to the make-up of the team, experience levels, any conflicts of interest, their personalities and, where necessary, the removal of any weak links from the team. In short, by analysing the management team in the same way that an external funder would, you will have early warning of any potential issues that may need to be resolved.
Managing confidentiality is particularly important, especially if some restructuring is required, and our commercial and corporate team can advise on any legal issues that may arise.
In priming your business for an MBO, you need to look at your business as a potential purchaser or funder would view it. How profitable is it? If it is not, what is preventing it from being profitable? What are the overheads, and can any be reduced quickly in order to increase profitability?
Naturally, the MBO team will be assessing all the financials during the due diligence stage, but if there are any realistic and viable cost savings that can be made to boost profitability in advance of a management buy-out process, this will only enhance your position.
The value and profitability of contracts in place will be important to the MBO team, and the funders, as they prepare their business plans.
As part of your quest for increased profitability, you will want to review your business contracts to see if any require attention. Do you have a particular contract that is highly lucrative and yet could be developed even further? Do you have any loss-making contracts that you need to terminate? Do any contracts include penalty clauses or other problematic clauses?
We can advise on any contractual issues arising from this review.
As human resources are such a fundamental aspect of any business, in preparing your business for an MBO it is vital that your staffing and organisational structure does not go overlooked. You will need to consider if there should be any reorganisation, and our employment law colleagues can advise on issues that may arise.
Likewise, if there are any critical members of staff that are essential to the successful running of the business, you may wish to discuss with them about any way you could secure their resource. For example, you could discuss retention incentives, bonuses, or perhaps even a promotion if everybody connected with the deal agrees that certain individuals are indispensable.
If your business is embroiled in a dispute that you could potentially settle, it certainly makes sense to consider all avenues to achieve this. The likelihood is that as the incumbent owner of the business you will be well-placed to make informed decisions about the litigation, knowing the background and history of the dispute.
On the other hand, ongoing litigation may create nervousness and tension amongst an MBO team owing to the high levels of uncertainty involved. As such, an early settlement may be in everyone’s interests.
It is commonplace for companies to carry debt, whether that be a bank overdraft, asset finance, business loan, mortgage, or any other form of debt. However, in planning for an MBO, it is important to address debt, particularly if it is running at significant levels or is proving an ongoing drain to your cashflow.
If your company’s existing debt is likely to be a concern to the MBO team or their funders, perhaps you should consider debt redemption as part of the deal or at least have a plan in mind as to how any debt will be dealt with in negotiations.
Where the company debt is personally guaranteed by you or secured on your personal assets, we can advise you on your options as the MBO progresses.
As we have discussed, preparing for a successful MBO requires an investor’s eye. With many deals being backed by individual investors or private equity funding, you need to be cognisant of their requirements and factor this into your plan.
Such investors will typically be looking for a strong management team and a robust business with opportunities for further growth and expansion, together with good cashflow levels. Since they will have in mind an exit strategy in the short to medium term, they will want the business to already be in a healthy position prior to investing.
How we can help
We will help you to plan for your management buyout by advising on all the key legal aspects that need to be considered. As such, there will be no hidden surprises and you will give your MBO deal the best chance of completing.
Our solicitors will guide you throughout the whole MBO sale process, from helping you to shape your business into an attractive proposition and agreeing the deal in principle right through to due diligence, agreeing contracts and completing.
If you need advice regarding an MBO sale, you should speak with a corporate or commercial lawyer with the appropriate expertise and experience at an early stage.
For an informal discussion, please contact Rachel Atherton in the corporate and commercial team on 020 7400 1535 or email firstname.lastname@example.org.