Gardner Leader

MBOs – TAKING CONTROL

The management buyout or ‘MBO’ is an increasingly common means for business owners to achieve an exit from their business.  Selling to the existing management can be an attractive option for both sides.  In this article, Derek Rodgers, Commercial Partner at Gardner Leader solicitors, looks at what is involved.

Before embarking on an MBO, the management team needs to ensure that they will not put themselves in breach of their existing employment agreements by doing so.  Spending time on a possible MBO during their working hours could conflict with their responsibility to devote their whole time and attention to the business.  Disclosing confidential information to advisers and potential funders will almost certainly breach their duty of confidentiality.  So it is important to obtain the existing owner’s consent before starting down this path.

The parties also need to bear in mind that the proposed MBO could fall through for any number of reasons.  If it does, will they be able to go back to working together as before?

One of the main advantages of the MBO route (compared to a trade sale) is that the buyers already know the business.  They are likely to be more comfortable that they know what they are getting and so not require as much protection in the form of warranties from the seller.  The seller also avoids the need to disclose sensitive confidential information to a trade buyer who might also be a competitor.  However, the management team will need to carefully consider whether there are any areas of the business where they have not had full access – finance and tax, perhaps – and where they will need additional protection.

Another consideration is whether the outgoing owner is to stay with the business in some capacity after the sale to the management.  This can often be useful to help with the transition, but both sides need to be prepared for the emotional and practical difficulties which can often arise from the change in relationships and status.

If the existing owner is not staying on, does this leave a gap in the management structure which needs to be filled by recruiting someone else?  Will this impact on the profitability of the business? These questions need to be considered carefully.

How is the MBO to be funded?  Many MBOs involve backing from venture capitalists. Often the VC will not only be a good source of funding but can provide additional board level expertise and experience to help the business on to the next level.  The management team will need to consider whether they are happy with the level of involvement in the business which the VC will want.  They will also need to be comfortable that the VC’s exit expectations fit in with their own plans for the future.

Properly handled, an MBO can provide a good outcome for all concerned, but the existing relationships between the parties mean that it can be more emotional and fraught than a fully arms length sale, so they require careful thought and good advice. 

[Back]