Preparing for a management buyout

For owners looking to sell their business, a management buyout (MBO) is one of a multitude of possible options available. What do you need to consider when preparing for a management buyout and what steps need to be taken?

If a business owner is considering an MBO as their likely exit from their business and the intention is for it to be a long-term success, then it is fundamental that careful planning is undertaken to put the key building blocks in place well in advance of the proposed exit date. When preparing for a management buyout, a seller should put themselves in the position of any would be investor and scrutinise the management team and the company in detail so that it can be presented in the best possible light.

Consider the management team

The formation of your company’s management team is integral to the likely success of any MBO; any new investor is going to look for a strong management team. The management team will need to be viable business owners because making decisions as owners are very different from those made during the day-to-day operation of the company.

Experience levels and skills coverage of the management team also need to be considered as these are important when determining the feasibility of an MBO. Are there any weak links or conflict issues with individuals within the team which could create issues post deal?

Make the company sale ready

Sellers may need to structure their business so that the company is sale ready. Points to consider include:

• making sure key contracts are up to date and signed, dated copies are on file;
• ensuring all employment contracts, job offers etc are up to date, signed and dated and on file for employees;
• conducting a thorough review of the statutory books of the company to make sure they reflect the current ownership structure of the company;
• making sure all company policies are in place and cohesively put together;
• addressing any outstanding disputes and/or litigation – can it be settled early?
• Ensuring the financials and debt position of the company are in order. How will the MBO be financed, is existing debt going to be a hurdle to any potential new equity or debt finance that is put in place as part of the MBO?

Plan for life after the sale

Finally, it’s important to consider what happens post-completion. For example:

• will the seller have continued involvement after the deal is done?
• how long does the management team propose to own the company for?
• how will the relationship between the management team and the sellers be governed?

Serious consideration should be given regarding entry into a shareholders’ agreement to govern the key matters of the ongoing relationship.

When preparing for a management buyout, sellers should instruct corporate solicitors and professional advisers to provide expert guidance from a legal, tax and financial basis and to help implement the most appropriate strategy for a successful transaction.

If you have any questions or queries, be sure to contact our team of experts.

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