Backhouse Jones Watermark

Top 10 Tips for Management Buy-Outs (MBOs)

04 September

1.       Enlist the help of a team of professionals from the outset – solicitors, accountants and financial advisors. Ensuring you receive guidance from the start of the transaction will put you in a stronger position and prevent potential mistakes from occurring.
2.       Develop an idea as to what type of finance you need – this will usually be debt finance, equity finance or both. Your professional advisors will help you figure out what is required, and this will form a framework within which to work going forward.
3.       ‘The Conflict’. Ensure the MBO doesn’t become a distraction from your usual line of work within the business. Preparing  for an MBO will take time and effort, but try to keep this separate from your everyday role; you don’t want the business taking a hit when you are trying to source funders and, ultimately, you need to continue complying with any director’s duties imposed on you by law. Sections 171 to 177 of the Companies Act 2006 include various duties, including the duty to promote the success of the company and the duty to exercise reasonable care, skill and diligence. Simultaneously, you should be looking to create a more valuable company so that you can sell the concept of the MBO to any potential funders and be a part of that success in the future. It is essential to strike the balance between the company’s interests and your own interests, but your professional advisors will be there to assist.
4.       Create shareholders’ agreements with the assistance of your solicitor. Although the MBO is a positive step forward with your fellow MBO team, it is always essential to prepare for difficulties further down the line, and shareholders agreements will provide solutions to ‘what if?’ questions. Think of a shareholder’s agreement as the business equivalent of a marriage pre-nup.  
5.       Set a time-frame within which to complete various stages of the MBO so you have an idea of what you’re working towards. At the same time, don’t make an unrealistic timescale – MBOs can require a lot of meetings, discussions, drafting and negotiating so they won’t happen overnight.

6.       Preparation is key! MBOs can cause upheaval to a business so it is crucial that the current owners of the business prepare with the MBO team to ensure a smooth transition. Identify the right people with the right skills to lead various aspects of the MBO, and make sure the team as a whole know the business, its customers and its suppliers inside out.
7.       Ensure the structure of the MBO and the business going forward is well thought-out. Will the management team purchase the business as individuals, along with the input of funders? Or will the individuals form a new limited company which will then buy the shares in the business? If it is the latter, solicitors and accountants should be involved in the new company formation and filing requirements at Companies House.
8.       Consider what warranties and indemnities are required by different parties, because it may not be as simple as having only the management team and current business owners involved: third-party funders may play a part. Generally, warranties and indemnities between the first two parties will be relatively straightforward because the management team will already be involved in the business so should know it in significant detail. However, the third-party funder(s) will probably ask for more robust warranties and indemnities as they are new to the operation and won’t want to risk their investment.
9.       Prepare your accounts accurately – funders will want to know exactly what they are contributing to. As importantly, prepare 3-5 year forecasts to present the funders with a detailed idea of the growth opportunities and their return on investment.
10.   Get a confidentiality agreement (also known as a non-disclosure agreement or an NDA) in place from the get-go. The owners of the business will not want potential funders obtaining access to confidential information, then inappropriately sharing that information with third-parties. Before the management team meet with potential funders and/or advisors, they will no doubt be required to pass on an NDA from the business owners to the interested parties for signing.

Strategic and measured business solutions providing 20:20 vision for your operation.