Business

Management Buyouts (mbos): What, Why, And How?

Issue 93

Having spent years, maybe decades, growing your business - establishing good working relationships, building careers, and generating revenue - now it's time to move on or retire. But what are your options? Sweeney Miller Law's Corporate team explore MBOs.

Management buyouts (MBOs) provide existing majority shareholders – usually founders – with a sensible and relatively straightforward exit strategy if they decide to retire or move on by allowing the existing management team to take over and maintain the growth trajectory of the business.

For an MBO to be as successful and straightforward as possible, it is vital for all parties to fully understand the pros and cons and exactly what time, resources, and commitment is involved throughout the process and beyond. Early clear advice from an expert legal partner can help with just that.

What is an MBO?

An MBO is a legal transaction where a company’s existing management team buys the shares, assets and operations of a business they already work in. Often the buyers then take complete control and ownership of the business, using their existing experience and expertise to continue to drive the company forward.

MBOs can be undertaken in companies of any size or industry, usually to buy out the existing owner, but can also be used by larger corporations to break away an arm or department from the main operation, sometimes as part of a wider restructuring process. Ideally, a successful MBO will result in a seamless transition for the outgoing shareholders, incoming buyers, existing staff, customers and clients, ensuring stability and business continuity for the benefit of each.

Why choose an MBO?

Choosing an MBO, instead of opting to exit your business via another route, such as a trade sale, saves both the seller and the buyers a significant amount of time and energy; there is no need to market the business externally or look for a third-party buyer. And with the buyers’ existing knowledge and experience of the business, there is considerably less due diligence required, often resulting in a less complex and swifter transaction.

As the process is generally all done ‘in house’, an MBO also helps to protect confidential information about the business throughout the sale. There is little to no need to share any confidential company details outside of those involved in the buyout, as there would be if the company was put on the open market with the risk of time wasting ‘tyre-kickers’. This ultimately reduces the need for non-disclosure agreements (NDAs) and lowers the risk of sensitive company details becoming public.

In our extensive experience of advising on business sales transactions, the success rates of MBOs are much higher than other business sale types, again due to the quantity and quality of ‘inside knowledge’ that the management team already has through often years of working in the business. The incoming team can hit the ground running with little, if any, disruption to the day-to-day functioning of the business, safeguarding valuable existing relationships with employees, customers, and suppliers who may become nervous of a third party buyer, particularly a competitor or a much larger organisation.

MBOs need not be out of reach

In our experience, one of the main challenges faced by management teams looking to buy the existing owner’s interests is how to pay for it. This shouldn’t be a barrier to a well thought through and planned MBO. With specialist help, external funding and investment can be explored either through bank loans, private equity, asset finance, owner financing, or a mix of debt and equity known as mezzanine financing. The lenders will carry out their own due diligence and will want to be satisfied that the incoming owners have the experience, “know-how”, and support from the rest of the staff to maintain and drive forward the business.

A carefully developed MBO proposal including details such as the management team members, the reasons and objectives of the buyout, and how the buyout will be financed, will generally be warmly welcomed by potential investors and the existing owners.

Commenting on MBOs, Corporate Partner, Jess Fenwick said: “Properly researched, planned and executed, MBOs are an often overlooked ‘win-win’ for everyone involved, providing a solution that safeguards and contributes to the continued growth of a business. Many see taking over the business as an unachievable ‘pipe dream’, but actually with expert support this can be turned into a reality. With our multidisciplinary and pragmatic approach, combined with our extensive industry connections and MBO experience, we can help to explore a range of options including financing. So do get in touch if this is an opportunity that you and colleagues are considering.”

Practical steps in an MBO

After developing a solid proposal, the priority for all parties should be to seek expert legal advice to ensure that the business and its interests are protected throughout the transaction. A corporate solicitor can be instructed to create a new management structure following the MBO, as well as draw up new shareholders’ agreements and advise on any other potential implications, such as any property or asset transfers and succession planning.

Sweeney Miller Law’s experienced Corporate department has advised buyers and sellers on many successful MBOs across a range of business sizes, industries, and complexities. Our partner-led, multi-disciplinary team understands that each business is unique and will take the time to understand you, your business, and your goals for the future. There are alternative avenues to company sales – such as management buyins (MBIs), buy-in management buyouts (BIMBOs) and trade sales – and we will take the time to understand which option is most appropriate for your business.

For advice on MBOs, or other types of company sales, get in touch with Sweeney Miller Law’s Corporate team by emailing enquiries@ sweeneymiller.co.uk, calling 0345 900 5401 or visit www. sweeneymiller.co.uk

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