Question 1

How are management buyouts usually funded?

Accepted Answer

Management buyouts (MBOs) are normally financed through borrowing from a bank or commercial lender. In most MBOs, the management team doesn’t have sufficient personal funding to pay the purchase price in full at completion, and consequently, they need to borrow funds and pay the purchase price over a period of time perhaps using profits from the company (distributed to them as dividends).   The deferred payments will form a part of the structure of the transaction that may mean the sellers will be paid over a few years.

Question 2

How long does a management buyout take?

Accepted Answer

I normally advise that once the price has been agreed that an MBO will take 6 – 8 weeks to complete.  As the management team is usually familiar with the operations of the company there is only limited due diligence.  However, any lender will need to be familiar with the company, and the negotiation of the documentation can take some time.

Question 3

What legal documents are required for a management buyout process?

Accepted Answer

The legal documents for a management buyout process can be split into 3 main categories: the investment documents, the acquisition documents and the finance documents.  The investment documents include the investment agreement, new articles of association and any loan notes or debentures. The acquisition documents include the share purchase agreement, disclosure letter and ancillaries in respect of the share transfers.   The finance documents may include a facility letter, inter-creditor deed and debentures or guarantees. There will also be documents required for the incorporation of the newco acquisition vehicle.

Question 4

What are the benefits of management buyout?

Accepted Answer

An MBO is the purchase of a controlling share in a company by its executive directors and/or managers. The principle benefit, therefore, is the purchase will be by a group of individuals who are already involved in the business and that should allow seamless continuity for employees, customers and suppliers.  In addition, the extent of the due diligence required (one of the most time consuming aspects of a company purchase) can be restricted and, consequently, completed within a shorter time period.  Finally, depending on the funding required and the position of the seller, there may be more flexible finance arrangements that could be agreed if the seller is to fund the deal by way of extended payment arrangements or lighter security.

Question 5

What is the difference between a management buyout and a leveraged buyout?

Accepted Answer

In short, not a lot as the reference to leverage is usually a way of describing the funding arrangements used in a management buy-out. It refers to the use of outside capital by way of bank loans or other finance.  The distinction being between the seller finance arrangements referred to above. In leveraged funding the lender will normally look for substantial security that could extend to personal guarantees from the management buy out team and charges over their personal assets (eg their homes).

Question 6

What is the management buyout process?

Accepted Answer

A management buyout is the acquisition of a company by the management team, moving from employees to entrepreneurs. The transaction process usually begins with business owners looking for an exit strategy. Management buyouts are similar in all major legal aspects to any other acquisition. It is common for the management team to incorporate an acquisition company (“NewCo”), there will be various documents required to incorporate NewCo.  There will be pre-contract documents such as a confidentiality agreement and heads of terms. The management team will complete a due diligence exercise on the business, however, there will be less due diligence as the management team will have a good idea of what the business entails.  The preparation of the acquisition documents such as the share sale agreement is not usually as long as a normal share sale, as it is standard in a management buyout the sellers would reduce warranties and indemnities. Other acquisition documents consist of the disclosure letter and ancillary documents.  Finance documents and investment documents will also be produced, these may include a facility letter, inter-creditor deed and debentures or guarantees. The investment documents may consist of a shareholder’s investment agreement, new articles of association and any loan notes. Management buyouts are usually funded by way of private equity investment and/or debt financing. The management team may invest a proportion of their capital, funding may also be available from the bank that is already familiar with the business or the management team may seek the funds from private equity investors.

Question 7

Can a buyer pull out after signing heads of terms?

Accepted Answer

The Heads of Terms in each transaction are always different so it is difficult to generalise.  The majority of Heads of Terms that we deal with are not legally binding except for any agreed period of exclusivity such that either party can pull out of the transaction but they will continue to be bound by the exclusivity period.    However, there might be other issues that arise if the seller pulls out including any corporate finance broker fees that may have arisen, or the payment of an amount to the buyer if this agreed in the Heads of Terms. The parties will still have to pay any professional fees that have arisen in the transaction so far eg accounting or legal fees.  Think carefully of the consequences before you cancel a transaction.

Question 8

How long will it take to sell my business?

Accepted Answer

We normally advise 6 – 8 weeks from when we take a client on.    However, there are so many factors in a transaction that can affect the time involved such as the speed at which the parties and their advisors act, complexity, whether there are any tough negotiating points etc.    The single biggest unknown factor in a transaction is how much time is needed for due diligence.  If you are thinking about selling your business then we recommend that you start preparing it for sale about 2 years in advance.    We normally take on clients when they have found a buyer and the price has been agreed, but the legal structure has yet to be agreed.

Question 9

What are heads of terms when selling my business?

Accepted Answer

The heads of terms is one of the first documents prepared on a business sale and sets out the main terms that have been agreed between the buyer and the seller.   The heads of terms are usually not intended to be legal binding (except in relation to any confidentiality, exclusivity of negotiations or costs provisions) but they provide an opportunity to agree on the key terms of the transaction before due diligence is commenced and extensive drafting is undertaken.

Question 10

What do I need to find out about buyers when selling my business?

Accepted Answer

We advise sellers to undertake some due diligence on the proposed buyer when selling their business.  For example, to consider whether the buyer can afford to buy the business particularly where an element of the consideration is deferred and due to be paid a period after completion.   If the buyer is a company and is issuing shares to the seller as consideration then the seller will need to establish that the buyer has authority to issue those shares, whether any consents or waivers will be required to issue the shares and also what the value is of the shares.

Question 11

What happens on completion of the sale of my business?

Accepted Answer

It is very similar to the sale of a house, in that all the necessary documentation that is needed to transfer ownership will be signed and dated and that procedure usually takes place remotely. Many sales don’t have exchange and completion stages, ie the sale is simply completed on an agreed day. So there is something of a paper chase to ensure that all the necessary documentation is signed and with the respective solicitors so that the matter can be completed.  There are also practical issues to be dealt with such as the handing over of keys/alarm codes if there is property involved, delivering trading documentation and announcing the change of ownership to staff. From the seller’s perspective, you have to be certain that no property that isn’t include in the sale is left in the property (if that is changing hands). Sometimes valuations of stock or other property take place on completion.  If no property is involved the issue is ensuring that all the assets the subject for the sale (eg laptops, mobile phones, machinery etc.) are delivered or made available to the buyer.

Question 12

Will I have any responsibilities or liabilities after selling my business?

Accepted Answer

The short answer is: yes. It is very rare to complete a deal without there being contractual obligations (eg warranties and indemnities that relate to the past trading of the business) on the seller that will continue for years following completion.   For general warranties (eg employees) that period would normally be for 2 or 3 years and for tax that can be 6 or 7 years. Our job, when acting for sellers, is to minimise the scope, period and amount applicable to those on-going liabilities.  It is also possible that the buyer might want to underwrite those liabilities by keeping part of the price (a retention) to claim against.  We also help to minimise or remove retentions so the maximum price is received at completion.

Question 13

Will I have to sign any covenants or other agreements when selling my business?

Accepted Answer

Typically, a buyer of a business will usually want to prevent the seller from establishing a competitive business that could diminish the goodwill of the recently purchased business.   The seller will retain business knowledge and could use this information to lure clients and old employees to their new business.   A share purchase agreement usually contains restrictive covenants that prevent the seller from doing the following after completion:  Carry on any business which is within the same sector or competition with the target business being sold; Poaching customers, suppliers or employees from the target business; and Restrict the use of any intellectual property owned by the target business.

Question 14

How do I form a company?

Accepted Answer

We recommend following the seven-step process as documented on the Government website.   Step 1 – Check if setting up a limited company is right for you.  We recommend obtaining appropriate tax advice from a registered accountant to ascertain whether or not a limited company is right for yourself and your business.  Step 2 – Choose a name   If the Registrar of Companies believes the name you have chosen is offensive or not appropriate they will reject your application. Remember to be unique, do ample research, think long term and check for the ideal domain name.  Step 3 – Choose directors and a company secretary  You must appoint a director, but it is not a requirement to appoint a company secretary.  Step 4 – Decide who the shareholders are and identify the people with significant control over the company (PSC)  There will need to be at least one shareholder, this person can also be a director. A PSC is any with voting rights or more than 25% of the shares.  Step 5 – Prepare documents agreeing on how to run the company   The main document that will need to be prepared will be articles of association. The Company Act 2006 provides that the model articles of association will automatically apply to companies incorporated on or after 1 October 2009. The articles of association are a public document and if the shareholders would like to keep company arrangements out of the public space we would recommend a shareholder’s agreement which is a private document in addition to the articles of association.  Step 6 – Check what records you will need to keep  You will need to keep records about the company (statutory books) and financial and accounting records. It is common in practice that a professional such as an accountant would assist with the upkeep of the records of the company.  Step 7 – Register your company  The company will need to be registered at Companies House, for this you will need an official address and choose a SIC code.

Question 15

At was stage of a dispute should a managing partner seek legal advice?

Accepted Answer

The answer to this question is a practical rather than a legal one, as whether legal advice is required depends on the nature of the dispute and the parties involved.  My general view is that it is better to seek advice as soon as a dispute starts as the managing partner may need to take action to protect all the partners. I would always advise that if a dispute is settled that legal advice is taken to ensure that the parties give up such claims and cannot resurrect them in the future.

Question 16

Does a winding up order have to be filed at Companies House?

Accepted Answer

A winding up order can only be issued by the Courts.   It must be recognised that LLPs and Partnerships are fundamentally different types of legal entities.  Partnerships are not registered at Companies House, whereas LLP are registered at Companies House.  Consequently, an LLP will need to make the winding up order public by filing the relevant form at Companies House.  If a petition for a winding up order is successful, the Official Receiver must send the winding-up order to Companies House as soon as practicable and it will be placed on the limited liability partnership's public record.  The entry of an LLP into an insolvency procedure may expose members of the LLP to the risk of a personal liability to contribute to the assets of the LLP.

Question 17

What legal rights do partners and LLP members have?

Accepted Answer

The main rights between partners in a general partnership are that they assume personal liability for the trading of the business. That liability should be properly covered with suitable insurance policies.  Partners are both the owners and managers of the business although there is usually a distinction drawn (in terms of rewards and responsibilities) between those partners who have put money into the business (equity partners) and those that are employees. However, when it comes to potential liabilities to third parties who deal with the partnership, no distinction is made between equity and non-equity partners.  That potential risk and other rights and duties should be covered off by way of a partnership agreement. In the absence of a written agreement then the Partnership Act 1890 applies and many of its provisions are outdated.  It is, therefore, best practice to have a written partnership agreement.  An LLP is a hybrid of a partnership and a limited company. The main distinction between an LLP and a partnership is that the owners of the LLP (members) do not assume personal liability. As the LLP is a separate legal entity it contracts with customers and suppliers.  The members that assume the management of an LLP are called Designated Members. The rights and duties of the LLP members should be set out in a Members’ Agreement. In the absence of a written agreement the LLP legislation referred to below will apply.  It is best practice not to rely on the LLP legislation and to have a written members’ agreement.

Question 18

What legislation governs a Limited Liability Partnership (LLP)?

Accepted Answer

The main legislation that applies to an LLP is the Limited Liability Partnership Act (2000) (LLP Act). Regulations (statutory instruments) have been issued pursuant to the LLP Act:  Limited Liability Partnership Regulations 2001 Regulations;  Limited Liability Partnerships (Application of Companies Act 2006) 2009 Regulations; and Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.    As mentioned above, it is best practice not to rely on the LLP legislation and to have a written members’ agreement.

Question 19

Should restrictive covenants be included in partnership agreements?

Accepted Answer

Very definitely: Yes!  When a partner leaves a partnership, they hold knowledge and have relationships with customers, partners/employees and suppliers which are very valuable.  Restrictive covenants and confidentiality terms are designed to protect the partnership from a former partner taking confidential information, customers or employees to another business. Such clauses also try and protect the partnership from the ex-partner trying to interfere with the trading relationship the partnership enjoys with its suppliers.  In the absence of well drafted clauses in a partnership agreement it is almost impossible to protect a partnership from ex-partners taking steps that could damage the business of their former partnership.

Question 20

What are the eligibility requirements for forming a LLP?

Accepted Answer

2 or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to the LLP’s incorporation document.  An LLP is incorporated by filing the necessary form (LLIN01) and paying the required fee at Companies House. That filing can be done either electronically or by using paper documents.  Filing and other formalities can be obtained from Companies House (www.gov.uk/government/organisations/companies-house).

Question 21

What happens if there is a partnership dispute?

Accepted Answer

A well drafted partnership agreement should contain some form of dispute resolution procedure which may, ultimately, result in one partner(s) buying out another partner(s). As the partnership relationship is based on personal liability it can be difficult to repair the business structure if there is a fundamental disagreement between the partners. Therefore, a mechanism which allows the partners to go their separate ways would be the preferred final solution.  In the absence of a partnership agreement, as stated above, the Partnership Act 1890 applies and there is little or no real provision in that legislation to facilitate the settling of disputes. Instead, the partners are left with the ‘nuclear’ option of dissolving the partnership. That is usually the last thing the partners want to carry out. Having said that, it can be a useful device to focus everyone’s minds to achieve a settlement, i.e. if notice of dissolution is given.

Question 22

What is the difference between a partnership and an LLP?

Accepted Answer

The main rights between partners in a general partnership is that they assume personal liability for the trading of the business. That liability should be properly covered with suitable insurance policies.  An LLP is a hybrid of a partnership and limited companies. The main distinction between an LLP and a partnership is that the owners of the LLP (members) do not assume personal liability. As the LLP is a separate legal entity it contracts with customers and suppliers.

Question 23

Can a partnership be dissolved or terminated?

Accepted Answer

Yes, there are 5 main ways to dissolve a partnership legally:  Dissolution of Partnership by agreement Dissolution by notice Termination of Partnership by expiration Death or bankruptcy Dissolution of a Partnership by court order  Dissolution of Partnership by agreement  Partnership agreements usually include clauses and procedures for dissolving the partnership. The partners must comply with the agreement. In many partnership agreements, a majority vote is not required to dissolve the partnership. If there isn’t such a clause, then all partners, unanimously, at the same time, must agree to dissolve the partnership. In other words, if partners agreed previously but then changed their minds, the partnership cannot be dissolved by agreement. Dissolution by notice If a partnership is at will, it is possible for it to be dissolved by notice. It is possible for a partnership to cease to be at will with very little effort.  There is a lot of complexity in the law. There are ways to establish a partnership that isn't at will.  If one partner leaves, the partners will continue the partnership. A written partnership agreement. The partnership is a limited liability company.  Termination of Partnership by expiration Where the time period expires or the contract ends the partnership is dissolved. Expiry is provided in the partnership agreement when it was formed. The concept of expired does not exist for limited companies. The shareholders voted to have Companies House strike off the register of members. There is a similar process for LLPs. Death or bankruptcy  Unless otherwise arranged, partnerships end at the death or bankruptcy of any partner. Partnerships should therefore have a formal partnership agreement that contains clauses allowing the collaboration to continue. The Partnership Act is complicated if there isn't a documented partnership agreement and the remaining partners intended for the partnership to continue. If the business trades as a Ltd company or an LLP, then the death or bankruptcy of a member does not cause the business to automatically dissolve. Dissolution of a Partnership by court order If the partnership were to dissolve by agreement, dissolution by the court would undoubtedly be contested. The court may dissolve a partnership if it finds that it is just and equitable to do so, for example, if there are only two partners and they have a falling-out; the business can only be operated at a loss; a partner is unable to operate the business, has engaged in conduct that negatively affects operations; is wilfully or repeatedly in violation of the partnership agreement; or acts in a manner that renders the agreement unreasonable.

Question 24

Can an LLP own asset?

Accepted Answer

Yes, an LLP is a separate legal personality and can own its own assets.

Question 25

What is covered in an LLP Agreement?

Accepted Answer

An LLP agreement is a contract created by all the LLP members to formalise and record the commercial connection between them and certain operating procedures. The agreement should cover the following areas:   Management and voting requirements: a description of how the LLP will be managed, how voting weight will be determined, and whether unanimous or majority votes will be required to make important decisions about the finances and operations of the LLP  Partner addition and withdrawal: the guidelines for how the LLP will handle the addition of partners, the voluntary withdrawal of partners, and the involuntary withdrawal of partners The rights and obligations of each member;  Means of regulating each member’s investment in the LLP;  Regulations for how company property is used and owned;  How profits or losses will be shared;  How the LLP is going to be governed;  How critical decisions will be made.

Question 26

What should a partner be aware of when looking to move firms?

Accepted Answer

Partners who are looking to move firms should be aware of any restrictive covenants and the length of these covenants. Usually partners would be subject to firm’s partnership deed. The typical restrictive covenants that can be expected to be found in the partnership agreements can include the following:   a non-compete – preventing you from joining a competitor firm;  a non-solicitation and non-dealing with clients – preventing a leaving partner from approaching clients or acting for them if they approached; and a non-poaching of colleagues – stopping a leaving partner from seeking to recruit colleagues.  Restrictive covenants for employees are normally only valid for a maximum of twelve months after termination. Contrarily, covenants for partners and LLP members may be substantially longer in term. There may also be "waiting room" clause to consider, which prevents partners from quitting a firm if a specific number of other partners do so within a predetermined time frame. Depending on the role of a leaving partner within the firm, they can also be subject to fiduciary duties, which essentially requires to act in the firm's best interests rather than your own self-interest. Additionally, there might be a duty of secrecy that forbids a leaving partner from sharing private and client information with outside parties which would include any recruiters and any potential new firm.

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