Whether you are managers of a division of a large group, managers of an autonomous subsidiary of a large group, or managers of a family-owned company, you may become aware that your shareholders have an agenda which involves possible disposal. If you believe that a management buyout is feasible and have the enthusiasm and desire to undertake it, how should you proceed?
Some sort of dialogue with the owners is required at some stage. Ideally this will lead to an invitation to you and your team to explore the possibilities of a buyout. However, it may be necessary to ask the question more directly. If the selling shareholders have appointed an intermediary to handle a sale, an approach can be made to the intermediaries. On other occasions there may be an appropriate non-executive director who may be an ideal initial contact. This is particularly the case if the company has a number of shareholders.
Much depends on the attitude of the shareholders to a buyout team. In some cases there is a hostility to the concept of a management buyout, in which case consideration may be given to a combination of a buy-in and buyout - Involving an initial approach from an outsider with a buy-in proposition, leading to the outsider being joined by the management at a later stage of the negotiations.
The advantages to a seller can be emphasised. These include the fact that the management team will not wish themselves to undertake vast amounts of due diligence, although their funders may wish to do so. The warranties, and other protections required by a trade purchaser, can probably be avoided in the case of a sale to the management team. Also there should be little difficulty in keeping together a management team which may feel under threat if moves to effect a trade sale are under taken.
Exploring the possibilities will include talking to professional advisers and potential funders. This inevitably involves a breach of the obligation of confidentiality which an employee owes to his employer. Hence it is wise to have a formal clearance so that information about the business and its finances can be divulged. Some buyout negotiations inevitably fail, usually on pricing issues, and if the breakdown has caused a deterioration in the relationship between management and owners, it is important not to hand to the owners grounds for dismissal.
There is perhaps a dilemma which faces buyout teams in the earlier negotiating phase to which there is no obvious answer. Traditionally, heads of terms were agreed with sellers and a proposal based on those terms was presented to the funders for consideration. Now, the funders are likely to be much more involved to the extent in some cases of more or less dictating the amount of the purchase price. Even the initial discussions can involve both the sellers and the funders to enable the management to get a feel for what is achievable. Inevitably, involvement of professional advisers is likely to be necessary and this means that fees are likely to be incurred. It may be possible, with a sympathetic seller, to obtain an agreement from the seller to underwrite such costs up to a certain amount. Alternatively, you might try to ask your professional advisers to undertake the initial work for a limited fixed fee.
One other matter to broach in early negotiations is the question of exclusivity. If you are incurring fees, it is particularly galling if a trade purchaser suddenly appears and makes a higher offer. If the seller has agreed exclusivity, typically for a period of three or six months the seller is then precluded from dealing with such an inquiry during that period.
If there are any particularly difficult issues, there is sometimes a temptation to address them later but this usually turns out to be wrong.
In one case, a management team declined to obtain a detailed survey of the company's premises, an old Lancashire textile mill, until the week before completion. The survey indicated that the mill, far from being an asset was in fact a liability. That proved an unsatisfactory finish to two months' hard work.
Effective professional advice and support can have a greater impact on the result in a management buyout situation than in any other form of corporate activity.
Most professional teams with corporate experience will be happy to spend some initial time with prospective management buyout teams without obligation. Establishment of an early rapport should pay dividends.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.
- Business Sales and Employees
- Buying Or Selling A Business Or Company
- Buyback Of Shares
- Completion Accounts
- Confidentiality Agreements (Or Non-Disclosure Agreements) For Acquisitions
- Disclosure Letters
- Due Diligence
- How Should A Management Team Start Negotiations?
- Locked Box Or Completion Accounts
- Share v. Asset Sale
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