Rise of the Management Buyout

Over a number of years now, there has been a definite trend towards business owners exiting by way of management buyout (sometimes involving family members) rather than looking to a trade sale. This trend shows no signs of abating, but what has caused this shift? Some of the significant factors which may lead a business owner to prefer a management buyout are as follows:

- less due diligence - a management team will already have a good idea of what the business entails;

- no lengthy share sale agreement and much reduced warranties and indemnities;

- a good pre-existing working relationship between the buyer and seller should make for far easier negotiations;

- funding may be available from a bank that is already very familiar with the business (in addition to angel funding or venture capital);

- no broker or finder’s fees;

- an MBO avoids the disclosure of sensitive business information to trade competitors; and a willingness on the part of vendors to provide significantly more vendor finance by way of deferred consideration, loan notes or preference shares.

All of this tends to result in an easier, quicker, friendlier and less expensive transaction, which takes a lot of the risk out of process from the seller’s perspective. But what is needed in order to execute a successful management buyout? Here are our top tips:

- put in place a strong management team as soon as possible;

- the seller must communicate the exit strategy to the MBO team;

- agree the price or a methodology for establishing a price as soon as possible;

- some form of Revenue tax clearance will almost certainly be necessary, so engage with your tax adviser early in the process;

- have the management team develop a business plan;

- make sure you have an advisory team with a track record of success;

- sort out the funding and the security for the funding at an early stage, this is the usual “drag factor” in MBOs;

- the management team will almost certainly require some form of shareholders’ agreement, make sure this is not overlooked until the last minute; and

- a cash flow forecast is important for lenders, but also for agreeing the repayment profile for any vendor debt. The ‘For Business’ teams at Tollers are ranked in the 2020 edition of the Legal 500 for their corporate work and have extensive knowledge and experience in dealing with these types of matters.

Craig Harrison Partner and Head  of Corporate
Craig Harrison Partner and Head of Corporate

If you are looking at exit strategies and would like advice regarding the best option for you, Talk to Tollers on 01908 396230 and the team will be happy to assist you. At Tollers we believe in Exceptional People. Exceptional Service, Exceptional Delivery.