An MBO is the purchase of a company by its current management team from its current owner.
This is usually achieved by creating a new company (“Newco”) to acquire the shares from the current owners.
The funding for an MBO can be found from a variety of sources, which invariably will include equity from the current management team, equity from outside investors, funding from the Bank and sometimes, deferred payments to the Seller. Where equity investment is provided by outside investors, it is likely that the outside investing institution will require a non-executive director to be appointed to the Board as its representative.
The current owners of the company will sell their shares to Newco in order to complete the transaction.
MBOs are usually brought about because the current owner wishes to retire. This is the usual reason, although there can be others, such as where a parent company wishes to sell a particular part of its business because it no longer fits in with its core business.
Selling to its current management team is generally considered to be a good way of securing the future of the business as well as that of its staff. This is because the current management team have the experience, not only of running the business but also developing it in the future.
The current management team will need to have a clear idea of how to develop the business and to make significant profits as part of the process.
The key ingredients to a successful MBO are paying the right price; the current management team needs to have a credible business plan which should cover the next five years, and they need to be able to replace the current owner insofar as his duties and roles are concerned.
MBOs have a relatively high success rate and the reason for this in part is because it is the same management team taking the business forward.
A credible business plan is an essential element of a successful MBO and it will also be essential in order to get banks and outside investors to invest in the MBO.
This is not difficult to compile, since the current management team will have access to the accounts and statistics for the business, and should therefore be able to prepare realistic cashflow forecasts.
A large part of the funding is often provided by a bank or other financial institution, or indeed an outside investor. Often, the current management team are required to make their own contribution which might be a small percentage of the whole, but it does give the banks and financial institutions the assurance that the current management team are committed to making it work. This contribution is often raised by them remortgaging their home.
Outside investors will often take shares in the company and they make most of their money from the transaction when their stake in the company is sold. Outside investors will usually have a clear exit strategy within 3-5 years in order to realise their investment.
Banks and other financial institutions generally don’t take shares in a company, but do require their capital investment to be repaid with interest at an agreed rate and over an agreed period.
Often, it is possible to negotiate with the existing owner for part of the purchase price to be paid by way of deferred consideration. This means that some of the purchase price is not paid upon completion. The current owner often agrees to this since he has a vested interest to ensure that the interests of the staff are looked after, and there is no better way of achieving this than selling to the company’s current management team.
In addition, it is not uncommon for an “earn out” to be negotiated, which means that the ultimate purchase price is dependent upon the performance of the company over the next few years after Completion.
We specialise in MBOs, whether you are the Seller or the Buyer. Leave it to us to make it happen!
We can also assist a current management team in sourcing finance, and we can also provide free initial advice in connection with a prospective MBO.
If you are the owner of a company wishing to retire or wishing to sell the company for other reasons, or you are part of a management team planning an MBO, contact us without delay and without obligation.