Management Buy-Out

Thinking of selling your company to your management team but unsure how to go about it?

Thinking of selling your company to your management team but unsure how to go about it?

One of the biggest challenges you face as an owner-manager is deciding who will take over the running and ownership of your business when you retire. With external funding for acquisitions in short supply, successful companies are increasingly setting up arrangements which allow for ownership transfer “from within”.

The first stage in Succession Planning is to consider your personal objectives and circumstances and the situation of your company and the alternatives available to you.

Management and/or prospective owners or investors can be brought in from the outside to strengthen the management team in order to grow the company and to provide funds for a buy-out (Management Buy-Ins).

A Clear Process

The key is to have a clear plan and a clear process that identifies and addresses different objectives and interests and reflects the strengths and weaknesses of the team.

The traditional Management Buy-Out (MBO) sees your management team come together to buy the business they work for.  The team will need to raise the necessary funds: this might be bank debt or other asset finance.  It may need to include private equity.

You, as the seller, may also provide funding by agreeing that the price the team pay for your company is deferred in whole or in part.

Investors (and perhaps you too) may well want your team to have “skin in the game”.  The historic rule of thumb was for managers to be asked to risk a capital sum equal to their annual salary.  In today’s world of ever rising property prices with your team struggling to buy their home, this may be unrealistic.

Vendor-Funded Management Buy Out

The Vendor Funded Management Buy-Out is a management buy-out but with the price being substantially funded out of the future cash flow of the business. It can also give you much greater control over the entire process and allows you to stay involved, if you wish.

The Everyman team really helped us to think through our personal objectives and decide how to start planning for the phased transfer of ownership of our business.

Project Management

The key challenge with the MBO is effective project management and to avoid the risk of a breakdown in relations between you as owner and your team.  With external investors and advisers, the transaction may become a battle between you and them over a fair deal price and buy-out terms.

The transaction will likely start with Heads of Agreement or a Term Sheet.  The legal documentation will include a Share Purchase Agreement or Business Purchase Agreement.  A Shareholders’ Agreement and Articles of Association will also be required.  Finance agreements including Debentures, Legal Charges and Loan Agreements may also be needed.

You as owner will want professional help to manage the process.  The bigger risk may be the risk of the transaction failing and you having an unhappy team.

Our dedicated team, based in Witney, Oxfordshire, would be happy to answer your questions.

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