Owner’s succession in the enterprise, sale of a company by an entrepreneur or corporation can create unique opportunity for managers with appropriate competences and motivation to become business owners. A management team faced with “proprietary” opportunity to participate or initiate company’s buy-out or buy-in has rare chance to build value and personal wealth, especially when they are entrepreneurial and have strong belief in their ability to grow a business.

We work with managers as their transactional advisers and help them prepare and execute a deal under exceptional circumstances and execution complexity. For most managers involved in such a process, it would be their first encounter with an M&A deal. Such complex process is often associated with high emotions, high expectations and time pressure.

As part of our service we create real value for managers as we approach the deal holistically and comprehensively. On a technical side, we provide full support in the development of a business plan, appropriate capital structure for a deal (sources of funding), valuation of a target company and due diligence investigation. Yet, negotiations can and most often will make for one of the most sensitive transaction components. We approach a vendor and conduct negotiations of key terms on behalf of and together with a MBO team. We work with managers to select most suitable equity investor or financial institutions that will provide deal funding at terms that are attractive to a MBO team. Finally, we provide expert advice during final stages of a deal, especially during the SPA negotiations and deal closing.

Management Buy-Out and Buy-In in a “nutshell”

Management buyouts have been well established for years as a vehicle for purchasing businesses:

  • A management buy-out (MBO) is the purchase of an operating business by its current management team,
  • A management buy-in (MBI), is the purchase of a company by a team of outside managers who seek to purchase a business they are currently not managing but thanks to their industry and sector experience they can successfully take over and grow,

Private equity firms, banks, and mezzanine funding providers are willing to develop business partnerships with MBO teams, should the following conditions be met:

  • MBO team has a strong business case with a good track record of profitability,
  • Managers are financially committed to invest personally and have a good spread of skills,
  • A vendor is willing to explore a sale to a management team, will accept a realistic price and a fundable deal structure,
  • There are good future prospects for a business without high risk factors,
  • There is suitable exit strategy for all parties involved.

MBO’s key success factors – three “L” Principle

Leadership – the most obvious and often the key to executing a MBO is the existence of a management team. The team – who will be expected to show commitment and to clearly articulate how the business will succeed – needs to invest personal money in a deal and must have a well-defined, coherent plan for the business.

Leverage – MBO’s often rely on significant amount of debt capital to fund a purchase. MBOs are appropriate for businesses with an established track record of cash generation and with relative low level of debt on its balance sheet. The MBO is not appropriate for a purchase of early stage businesses that are cash flow negative or are in need to make large capital infusions to gain scale or cost positions.

Liquidity – any MBO that requires banks, investor or both to supply funds for a deal must have a reasonable path to future liquidity:

  • Equity capital – private equity investors, as the most prevalent source of equity capital in today’s markets will need to achieve liquidity in a 3 to 7 year period and therefore will seek to agree on a well-defined exit strategy. Quality of the exit opportunity will affect the attractiveness of a deal and the ability by managers to attract investor capital. For these deals the exit plan is normally to sell or float the company after 3 to 7 years. For a successful deal, a private equity firm will seek to achieve returns of not less than 2,5 – 3,0x times their original equity investment.
  • Debt – a debt provider will usually expect both interest and borrowed capital to be paid back out of a target company’s cash flow over a specified period, often 5-7 years. Unlike private equity firms, debt providers will not want to rely on an exit for the repayment of the loan. Usually a company would be free of debt within 5 years and able to pay ongoing dividends or bonuses to its new owners.

How does the MBO team know if it's ready to do the transaction?

There are two vital factors to consider: MBO team skills and the team’s financial commitment.

  • MBO team skills – MBO team must have a balanced mix of expertise to achieve success. Financial institutions or private equity investors will largely fund an acquisition of a business, however in substance they will be largely backing the management team’s abilities and track record. It may be that not every member of the management team wants or indeed should be part of a MBO team. Each team member must bring important skills to the transaction to create a rounded executive power base. This means that representation on a MBO team is likely to include CEO, COO, Head of Sales and CFO as appropriate. Where MBO team is large it may be appropriate to appoint someone to head the MBO process on behalf of the MBO team. If you are missing key skills, then you may need an external candidate to complete the team.
  • Financial commitment – each MBO team member must be both willing and able to invest its personal money in the purchase of a business within the agreed transaction timeframe. Nevertheless, MBO’s are structured to protect personal assets of the MBO team, which means that even though each MBO team member provides funding for a transaction, they usually do not involve any other, personal assets in their own name which would be at risk.