Selling to management
All answers are for general guidance only. Each case must be handled on individual facts.
Q: What is involved in selling to the management team/family (i.e. MBO)
Selling to the management team or family by way of management buyout (known as an MBO) involves the sale of either shares in a company (share sale) or the business and assets of a company (asset sale) to a buyer. The buyer is typically a new company (Newco) set up specifically for the acquisition. This process usually involves an institutional lender and one or more private equity investors.
The sale to Newco by way of MBO is similar to a sale to a trade buyer. However, there are some key differences:
• Planning: plan ahead to ensure:
• A strong MBO team is in place (essential to obtain funding/investment and maximise price)
• The target company or business is correctly structured (consider the need for a pre-sale reorganisation or demerger)
• The deal is structured to reduce the seller’s liabilities (both to HMRC and Newco)
• Confidentiality: an MBO reduces the risk of disclosing sensitive business information to trade competitors
• Due diligence: the MBO team understand the business so any due diligence exercise will be less time-consuming
• Risk: given the management team’s understanding of the business, the seller will expect Newco (and any private equity investor) to accept a greater degree of risk; ultimately the seller’s exposure under the sale and purchase agreement (in terms of both warranties and indemnities) will be significantly lower than under a trade sale. This will allow the seller to obtain a cleaner break. However, the seller should be aware of the potential consequences of a failed MBO bid, which may leave key members of the management team disenfranchised
• Funding: given the higher degree of risk assumed by Newco (even more so in the current economic environment), funding may be more difficult to obtain. The seller will normally be expected to defer some of the consideration to assist the acquisition; this deferred consideration will often be subordinated to the institutional lender and private equity provider
• Professional fees: the sale to an MBO team typically costs the seller slightly less than a trade sale in both legal and advisory fees
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