Essential Documentation for Management Buyouts

Management buyouts of owner managed businesses are strategic transactions where the existing management team acquire a significant stake or full ownership of a business in which they are currently employed at a senior level. These can be a balanced tool allowing sellers to pass on a business to a longstanding management team while ensuring a payout to themselves.

1. Record of Key Terms

While management buyouts can be completed quite informally, it is important that key terms are agreed and recorded at an early stage to ensure that there are no miscommunications later. Formal Heads of Terms can be agreed between the parties, but commonly there will be an informal record of the terms in correspondence between the sellers and the management team.

Regardless of the form of the document, key terms to agree should include the purchase price, proposed financing structure and due diligence scope (if any).

1. Share Purchase Agreement

The Share Purchase Agreement is the core document in management buyouts, outlining the detailed terms of the transaction. This legally binding contract covers aspects like the purchase price, payment terms, any protections given to the management team, and the mechanics of the share transfer.

1. Finance Documents

Dependent on the manner of financing the management buyout, various finance documents may be required. Even if the seller is allowing the consideration to be paid on a deferred basis and therefore external finance is not required, it may still be appropriate for the seller to take some security in respect of the sums owing to them.

1. Shareholders’ Agreement

While the seller will not necessarily be interested unless they are retaining some element of ownership, the management team will need to agree terms between themselves as to how they will own and manage the business following the acquisition.

1. Due Diligence Documents

There may be some due diligence documentation required although given that the management team are likely to already know the business well, this will probably be limited. If external finance is required, then a more formal due diligence process and level of documentation may be required.

1. Employment Contracts and Incentive Plans

Ensuring the continuity of key management personnel post-acquisition is critical. Revised or new employment contracts may be required to formalise roles, responsibilities, and compensation structures. Additionally, incentive plans such as share options or performance bonuses may be implemented to motivate and retain key personnel.

Please contact Thomas Clark or a member of Doyle Clayton’s corporate team should you require any advice in respect of management buyouts or assistance with putting any of the above documentation in place.