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Things to consider when looking at selling to an MBO

Lynne Rawlinson


When it is time for you to move on and sell your business and you are contemplating an MBO here are a few things to consider.

The benefits of selling your company via a Management Buyout are numerous.

Firstly, selling your company to the management ensures a very smooth transition with customers and other members of staff, they are much more likely to be comfortable when they know who they are dealing with and the transfer of ownership is likely to be a more seamless transition.

Secondly potential funders are more likely to view the proposal in a more favourable light if they know that the key management of the business are committed to taking the business forward by acquiring the equity in it. It is always a worry that a new external owner comes in and alienates the incumbent management team and seriously impacts on the companies’ financial and operational stability.

The other issue with offering your company on the open market is that, no matter how much cover you have in place, even with Non disclosure agreements etc, there is always a chance that people can become aware that the business is up for sale, causing key employees and customers to become unsettled or disillusioned and possibly vote with their feet resulting in potentially challenging situations.

Selling to an external purchaser also involves a more detailed “due diligence” process which can throw up issues meaning they can walk away and you are back to square one. Generally the management will have a detailed understanding of the inner workings of the business and where the threats and opportunities are and progress a deal more quickly.

Once you have decided that you want to progress an MBO it is vital that you engage the services of an experienced corporate finance advisor who will help with the next phase. This will involve the preparation of a detailed business plan which will look at the history of the business and where it has come from in terms of financial performance and market share, it will generally include a career profile of the people proposing to do the buyout.

The advisors will prepare a detailed balance sheet and financial projections for the company going forward  looking at the sensitivity of how it will be able to service the debt the company is going to be taking on to help fund the acquisition.

The advisor will help determine the value of the company and how to fund delivering all of that value back to you in the quickest time frame.

There are numerous ways of structuring a deal from a financial perspective. The banks will generally lend in the region of around 2.5 times EBITDA, so the MBO team will have to find some money to put in, which will be enough to keep them engaged and committed but not looking to crucify them financially.

Other  types of debt can be used to help fund the acquisition, you may have heard the phrase Mezzanine debt which is the middle layer of capital between senior debt and equity, this type of debt is not usually secured and is lent based on the company’s ability to re-pay the debt from free cash flow.

Beyond that there are other avenues such as venture capitalists who will take some equity in the company with a view to looking to exit after an agreed time frame.

Finally the most painful part, you will generally be required to take a deferral on some element of the payment, this can be structured in various ways such as loan notes. You need to be clear at this point how much you are comfortable with deferring, as there is a risk that you might not see all of this money if the company gets in to financial difficulty in the coming years.

You also need to be clear where your debt to the company is subordinated in the pecking order, it will quite often sit behind the banks so if the company does get in to trouble the bank will take precedence.

Once all of these things have been discussed and agreed with your advisor it is time to approach the lenders to see who will offer the best terms to fund the MBO. It makes sense to start with your existing Bank to obtain their views as they have detailed information on the financial management of the company. Your advisor should have a clear understanding of which lenders would be ideal partners to work with on the buyout and will arrange meetings with them to present the business plan documentation.

Once funding partners have been found and a deal structure agreed then you and your management team will need to engage different sets of advisors, certainly from a legal perspective they will need to take independent advice from a corporate lawyer.  Once the lawyers get involved it will obviously throw up some challenging areas of discussion between what your Lawyer wants for you and what the MBO teams lawyer and the Banks lawyers want for their clients, you have to remain pragmatic through this process and try not to take things personally as it can be quite a difficult period, but between a committed seller and a willing buyer there is always a way of reaching an agreement with a little bit of a compromise.

When trying to conclude the deal, the main areas to focus on are.

 1) Are you comfortable with the proposed financial projections and the companies’ ability to service the level of debt it will have.

2) Has your legal advisor built in sufficient controls to ensure that the new shareholders cannot act irresponsibly in terms of how they remunerate themselves or declare dividends or take on additional borrowing that will prejudice your chances of getting the monies that you have left in the company as deferred payment?

3) Is the new management ownership structure solid as a team and able to deliver the performance required without your input on a regular basis?

4) Are the new articles of association and shareholder agreements robust and ensure that should there be any major disagreements between the new owners it can be dealt with without wiping out the company.

All things considered if you have built your business with good succession planning through the years, then a management buyout is a very good way of realising your value and ensuring good continuity of the business you have spent years building up. It is a good way of ensuring that the people who helped you generate the value in your business will have a chance to potentially benefit financially themselves once they have cleared the debt the company will be taking on. If you are ready to sell and you are not in a position to find someone to write a cheque in full. Then the deferred amounts of money you will have to leave in the company may well feel more secure with people that you know and developed trust with having worked with them in the preceding years.

Handing over your Baby to these people may feel more comfortable than letting complete strangers take it on.

Whichever route you choose you need to have considered all possibilities and make sure that you are as comfortable as possible with price that you accept and the amount, value and security of any deferred monies needed to complete a deal. If you have built a good strong management Team then it makes sense to give an MBO serious consideration.