Management Buyout Experts

Selling your business to the existing management team has a number of advantages, including that the existing management team has a clear understanding of the business. 

Given that the management team will already have working knowledge of the business, it is generally anticipated that the business owner will expect the management team to accept a larger degree of risk than would usually be expected of a third-party buyer. The result of this is fewer warranties and indemnities, meaning a cleaner break for the business owners.

The fact that the buyer in an MBO is the existing management team (or part of it) also means usually there will be a reduced due diligence exercise required. 

As the buyers are already part of the business, the due diligence exercise is likely to be considerably shorter than it would be in a sale to a third-party buyer. However, this does not necessarily mean that the transaction process will be materially shorter overall. Much of the time spent on a management buyout will be dedicated to the negotiation of warranties and, in the case of the buyer, liaising with any equity investors. The level of warranty cover that the selling business owners are likely to offer to the management team will generally be lower than on a sale and purchase between parties at arm’s length. This can cause issues for the buyers who may be ready to accept lower warranty cover but whose private equity investors may require comfort from more extensive warranties to ensure protection for their investment.

Funding will typically be a key part of a management buyout and this will often involve some kind of management equity (often in the form of a sacrifice of between six- and twelve months’ salary), bank funding, private equity, deferred consideration, or a combination of these. Private equity investors will usually want to exit and realise their investment within a five-year period, whilst a seller accepting deferred consideration will typically expect some sort of comfort that deferred payments will be forthcoming on the due dates for payment. This inevitably raises the question of what (if any) security the bank and/or private equity investor (as the case may be) will permit the buyer to grant to the seller and how any such security will rank in priority to payments due to such bank and/or private equity investor.

Management buyout transactions often also utilise earn-out provisions, with the consideration for shares potentially increasing and future payments becoming due to the selling business owners depending on the performance of the business in a period of one to three years post-completion of the management buyout.