Management Buyout Definition
Put simply, a management buyout is when the management team of a company pool together to acquire the company they manage, either wholly or in part. Often the management will buy the company in whole with a view to growing and driving the business forward. Sometimes one or more private equity investors will also acquire the business with the management team.
Why Sell to Management?
A sale to the existing management of the target business or company has a number of perceived advantages from the seller’s perspective. For example, the existing management team know and understand the business. They may also be key to the business.
An MBO avoids the potentially damaging disclosure of sensitive business information to trade competitors. This will help reassure a seller who is concerned about a transaction with a trade buyer collapsing at an advanced stage after that buyer has had access to sensitive information relating to the business.
Given the management team’s familiarity with the business, the seller will often expect the management team (in combination with a private equity investor) to accept a greater degree of business risk than perhaps other prospective buyers would be prepared to accept and so obtain a cleaner break (and perhaps even a higher price).
MBOs are often portrayed as an easy way for management to realise a substantial gain within a period of between three and five years under a favourable tax regime. Although MBOs can undoubtedly be a road to riches, they are full of risks, particularly for management, who may be pulled in different directions as a result of the conflicts which they have.
Management can also exert pressure on the seller, particularly in an auction process or where the seller is attempting to sell the target business or company to other prospective buyers, as a seller may be reluctant to sell against management’s wishes.
The seller’s wish to have management on-side can be a trump card in management’s hands if they want an MBO to happen, provided due regard is given by management to their directors’ duties (if they are also directors) and their duties as employees.
Finally, consider this…
On an MBO, the level of warranty cover that the seller will offer to the buyer will typically be significantly lower than on a purchase between arm’s length parties because of the knowledge that management already has, or should have, about the target business. The giving of warranties is in many cases the most contentious area for management on an MBO. It can pit them directly against both the seller and the private equity investor. While a reduced level of warranty protection may be acceptable to management because they know the business, it is unlikely to be acceptable to the private equity investor funding the deal who will wish to adequately protect their investment.
If you are looking to sell your business, whether to a management team or a private buyer, it is vital you seek legal advice at the earliest opportunity, Farleys’ corporate team can help you complete the transaction and help alleviate some of the pressures that inevitably occur. Call the team today on 0845 287 0939 or contact us by email.