MBOs and MBIs can be complex and time-consuming and often bear risks for the involved company and the management team. Therefore, it is very important that you seek an experienced corporate legal advisor as soon as possible.
With offices based in Leeds, Sheffield and York, we have solicitors specialising in providing legal advice for private companies who are ready to help you with your MBOs and MBIs. Get in touch by calling 0333 323 5292 or by completing the enquiry form and we will call at a time that is convenient for you.
What is an MBO?
A management buy out (MBO) is a form of acquisition where a company’s existing managers acquire a large part or all of the company from either the parent company or from the private individual owners.
What is an MBI?
A management buy in (MBI) is a corporate transaction in which an outside manager or management team purchases an ownership stake in a company and replaces the existing management team. This type of action can occur due to a company appearing undervalued or having a poor management team.
What is an IBO?
An institutional buy out (IBO) is a corporate transaction which will see an institutional investor, such as an external venture capitalist (VC) or private equity (PE) firm, approach a business and purchase a controlling interest; typically in order to take advantage of its market growth potential. In many cases, IBOs will see the VC / PE firm purchasing the established business and decide to retain the much of existing management team. They may also look to bring in a new management team and make them stakeholders in the business in order to maximise the company’s growth and development.
What is a VIMBO?
A vendor initiated management buy out (VIMBO) is a virtually identical process to a management buyout (MBO) with one key difference – the vendor (selling company or private individual owners) is the one making the approach to the management team rather than the other way around.
What is a BIMBO?
A buy in management buy out (BIMBO) is a type of transaction that combines the characteristics of a management buy-in and management buy out. This type of transaction is ideal for companies that have strong operational management, but lack leadership with the exit of the selling owner. A BIMBO occurs when existing management – along with outside managers – decides to buy out a company.
Within the corporate finance team at Lupton Fawcett, we have extensive experience of a wide variety of MBOs, MBIs and more.
Lupton Fawcett has substantial and recent experience of advising on MBO and MBI transactions, working together with our corporate finance colleagues.
Funding an MBO
Management teams can be under the illusion that a buy out is not possible because, collectively, the team members do not have sufficient funds to meet the purchase price. This is quite a common misconception. It is true to say that members of the buy out team are required to invest a sum of personal money into Newco in return for an equity interest (a “stake”) in the business. However, the vast majority of the consideration is usually provided by third party financial institutions such as banks, venture capitalists and even the vendors themselves by way of deferred consideration. Sources of finance for a buy out are summarised below.
The personal investment required by members of the buy out team needs to be meaningful to each individual taking into account their own financial position and personal circumstances. The sum need not be vast but will typically represent around 6 to 12 months’ salary. The investment made by management serves to demonstrate their belief in and commitment to the MBO to third party funders.
Banks obtain their return on investment by way of interest on the sum advanced. The availability of bank finance is therefore reliant on the ability of the business to service the future capital and interest repayments following legal completion of the buy out.
Funding from a private equity or venture capital investor will always be conditional upon their taking an equity stake, usually as a minority shareholder in a new holding company. The investment returns on a private equity investment are twofold: interest income on the funding provided and capital growth in the equity stake. Private equity providers make the majority of their money on the sale of their shareholding when the company is sold, usually within a period of around five years after the MBO. Consequently, this type of finance is typically only available in support of those buy outs where substantial capital growth and a relatively fast exit is anticipated.
Vendor deferred consideration
Vendors, as you would expect, prefer the consideration to be paid to them in full at legal completion of a transaction. However, this is rarely feasible and vendors usually need to defer a proportion of the consideration in order for an MBO to proceed. Indeed funding offers are normally conditional on a proportion of the consideration being deferred.
Business cash flows may be insufficient to support capital and interest repayments on the amount of debt which would otherwise be needed; furthermore, funders gain comfort from the vendor’s’ financial endorsement of the management team.
An earn-out is a specific type of vendor deferred consideration whereby additional consideration is payable to the vendors contingent on the future trading performance of the business following completion of the buy out. The vendors may believe that the business is worth more than the MBO team does or more than can be funded based on its past financial performance. Including an earn-out structure may lead to additional consideration being payable to the vendor if the business achieves or surpasses specific financial targets following completion of the buy out. An earn-out helps to maximise the value of the business for the vendors and eliminate uncertainty for the MBO team.
Read how we helped a Leeds-based businesses complete management buyouts:
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