Management Buyout Videos

What is a Management Buyout?

In simple terms, a Management Buyout is a transaction where the existing management team of a company acquires the business from its current owners.

Why consider a Management Buyout?

Management buyouts are attractive for a number of reasons:

1. Continuity of the business with the existing employees continuing the relationships. It also provides the current owners with the comfort that the business is in safe hands after they have left.
2. It can generally being a simpler process than a sale to a third party, because the third party does not already know the business and the management team do.
3. It also allows flexibility of payment of the purchase price in circumstances where finance can be expensive or unavailable.
4. It provides motivation to the management team to ensure that the business continues to succeed.
5. And finally it can be seen as a reward to the management team for all their hard work.

Key Players in a Management Buyout

In management buyouts there will be a number of key players including investors, lenders, and legal advisors, however, most important is having an experienced and highly motivated management team to take the business forward. Without this, the current owners are unlikely to have the confidence to hand the business over, especially where the consideration is mostly to be paid later and after completion.

Summary

In summary, a management buyout is a sale of a business by the current owners, generally to non-owner managers who will take the business forward. It is a highly flexible exit approach which can provide current owners with a rewarding handover.

Deal Structuring

Starting with the basics, structuring a Management Buyout deal involves instructing a good team of professional advisers at an early stage in order to help build the best possible structure for the transaction.

Following this it is critical to involve the management team purchasers as early as possible in order to establish if they have the appetite to take the business on.

Valuation Methods for Management Buyouts

Valuation of the business is critical to any management buyout, as well as ensuring that the expectations of the current owners are realistic.

Instructing an accountant to assist with the valuation will be helpful if it is not possible to understand and agree a value with the management team easily.

If the management team need to obtain finance to complete the management buyout then obtaining a valuation may be more important in order to ensure that the management team can present this valuation as part of their funding application.

Of course if the current owners have unrealistic expectations as to value, then this will serve not only to turn off the managements interest in the transaction but also to limit their ability to obtain finance.

Financing Your Management Buyout

Securing the necessary funds is a significant challenge in Management Buyouts.

Management buyouts will usually be financed in the form of a combination of the release of free cash, debt and seller financing. Seller financing is where the current owners agree the consideration to be paid over a period following completion, rather than at completion.

It is important to work with your professional advisers to structure the consideration in a way that limits the risk to the current owners, but also so that the management team can realistically service any payment obligations.

Often agreeing the form of consideration payable to the exiting sellers will be dependent on the finance available to the management team, and it can take compromise on both sides.

Documenting your Management Buyout

Once the Management Buyout structure, valuation and finance have been established, it will be time to document the transaction working with your legal adviser.

It is important to draft the documentation in a sufficiently comprehensive manner to ensure that all of the parties understanding of the transaction is correctly recorded.

Issues can unfortunately occur after completion of the Management Buyout where the parties have been overly relaxed in the documentation, and this can lead to disputes and disappointment.

Legal Considerations in Management Buyouts

Completion of a management buyout broadly involves the same process as a sale to a third party purchaser, but because the buyer, the existing management, already know the business, sometimes it can a quicker process, as for example, there will be less due diligence required, and the buyer may be prepared to proceed with less protection.

However, the current owners should still expect to be required to agree and execute key documents such as a sale agreement and disclosure letter, as well as other ancillary documents such a settlement agreement and directors resignation letter.

Common Legal Challenges

Some common challenges will often arise around how the consideration is paid, especially if it is not paid all at completion.

If the consideration if deferred and to be paid later, the current owners may, quite reasonably, require the company and the management team to provide them with some security in the form of a debenture or personal guarantee, this will protect them against the payment commitments not being honoured.

Whilst it would be usual for the existing sellers to give less protections to the management team, in the form of warranties for example, there may be areas where the management team do not have sufficient knowledge of the business, for example where information has historically been kept from them, and in that event they may need sufficient protection.

If the management team purchaser is required to obtain finance to complete the purchase, the finance provider may require them to have documentation that is more comprehensive than was anticipated. The parties need to try and find a flexible middle ground which is acceptable to all.

Importance of Advisers

Advisers play a crucial role in steering the Management Buyout through complexities and areas of disagreement, because usually they will have seen the same points arise time and time again.

A good adviser can make suggestions that they have seen work in the past, and this can ease tensions between the parties which could otherwise lead to the deal falling over.

Impact on the Team

From concerns about job security to changes in leadership, it is clear that there are some aspects of Management Buyouts need to be dealt with carefully to ensure that there is a successful and profitable transition to the management team purchasers.

Communicating Change Effectively

Communication is key during times of transition, and it is especially important to ensure that the plans for the business are clearly communicated where a Management Buyout is proposed.

Clear communication will ensure that employees retain their sense of job security and motivation in the transition period. This gives the business the opportunity to retain the best staff for the future, and ensure that high motivation and morale are retained.

Motivating non purchasing employees post Management Buyout

Of course, there will be employees who are not part of the purchasing management team, and it is important to remember that they need to be motivated as well. It may be necessary to consider specific alternative incentives for those key members of staff to ensure that they stay post completion of the Management Buyout.

Integration and Synergy

Once the transaction is complete, for the management team the real work is just beginning.

Whilst it is exciting to that they know own the business, it can be a high pressured time, especially given financial obligations agreed as part of the Management Buyout.

At this important time, it is in both the exited owners and management team purchasers interests to seamlessly integrate their operations, people, and culture for maximum synergy.

Adapting to Change

As part of the Management Buyout it will be important to have a well structured business plan to implement post completion. This will embrace the enthusiasm and energy of the management team purchasers, and maximise the possibility for success.

Often new business owners will look to implement fresh ideas, and to make synergies which can lead to higher profits but it is important plan and implement these ideas in a measured way. A good business plan will help with this.

Business plans for the Management Buyout will need to foster a culture of continuous improvement and innovation, ensuring that the acquired business remains competitive in the ever-evolving market.

Communication

As we touched on previously, continuous communication will be key to success because this will ensure that the entire employee pool are on the same track, and they fully understand what the business is trying to achieve.

The management team purchasers should use clear communication with the employees to ensure that no one is left excluded and unmotivated. It may be that employee incentives need to be reviewed to ensure that an inclusive culture can be continued.

Success

If the Management Buyout is as successful as everyone hopes, then it may be possible to repay any finance used to facilitate the deal earlier than expected and this will enhance the profitability available to the management team. However, the focus should be on a steady repayment of the funds, ensuring that the business does not take unnecessary risk.