Corporate Law FAQ’s

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.

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.

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.

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.

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).

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.