Recent events at the Tata Steel plant in Port Talbot have brought management buy outs into the news spotlight. But what are management buy outs (or MBOs as they are more often referred to) and what is involved in the process? Paul Tyrer from our corporate team has provided a quick guide to the process and pitfalls involved in an MBO.
A Quick Guide to Management Buy Outs (MBOs)
Management Buy Outs are not new – they came to prominence in the late 1970s and are now an established feature of the deal market. In simple terms an MBO is when the existing owners agree to sell the shares in their business to the existing management, usually in co-operation with a team of funders or external financiers. MBOs can vary considerably in size and scope, from a small family run business through to a billion pound business such as Tata Steel, but in all cases there are a number of common characteristics:
- An MBO involves the existing management acquiring an equity stake in their business, usually for a relatively modest level of personal investment;
- The deal will usually involve the existing owners selling all their shares and departing from the day to day control of the business;
- There can be a number of motives for an MBO including succession issues, preserving jobs in a receivership situation or the divestment of an unwanted part of a business;
- The key factor in external funders backing an MBO is a team of balanced and well experienced managers that are prepared to take on the business – the management team will need to convince funders that they have the requisite experience and ambition to drive the business forward.
Management Buy Outs are typically funded using a blend of debt and equity finance. Debt involves bank loans, overdrafts and asset finance whereas equity investors take a share of the business, usually in return for a higher return on their investment to reflect the greater risk and lack of physical security. The exact amounts of debt and equity involved will normally be put together by the management team’s advisers.
Stages in the process for Management Buy Outs
There is no such thing as a typical MBO, but most transactions will involve the following stages:
- Identifying the opportunity – the opportunity can be identified by the incumbent owners, the management team or external advisers. A key factor is ensuring that the team have the right level of aspiration and commitment to grow the business;
- Business plan – once a suitable team has been identified the hard work begins. They will need to put together a detailed business plan that demonstrates to funders their appetite and ability;
- Due diligence – a critical part of the entire process which involves legal and financial investigation to ensure that there are no ‘skeletons in the closet’ which may impact on the value being offered and paid for the business or cause any issues post-completion;
- Legal documentation – the core document is the share sale and purchase agreement, but there will be a large number of related documents that need to be drawn up, reviewed and agreed relating not only to the purchase itself, but the funding and the organisation of the equity post-completion. Each team is likely to appoint its own advisers and so it is not unusual to have three or four sets of solicitors advising on the terms of each of the key documents.
Aspects of successful Management Buy Outs
Most Management Buy Outs rely on a strong and determined management team, a detailed business plan and a well structured deal, but that is only the beginning. A successful MBO requires the ongoing support of funders and advisers to produce a successful outcome. Often the completion of the deal will be just the beginning as the new management team look to shape the business to implement their own plans and managing this change can be critical to a successful result for all of the parties involved.