We are currently busy advising and completing many Corporate Finance deals including several Company Sales and Management Buy Outs (MBOs). 

We are regularly asked to explain how these work and therefore thought it would be worth explaining the whole MBO process and considerations in a bit more detail.  

A management Buy Out (MBO) is a transaction in which a company’s existing managers purchase a full or controlling stake in the company from its current owners, typically involving a combination of debt and equity, which may come from the management team, outside investors or private equity firms.   

The current owners will receive a payment at completion and usually some form of deferred consideration and/or earn-out, depending on the deal agreed.  

In an MBO, the existing management team becomes the new owners of the company, and the transaction allows them to gain more control over the company’s strategic direction, operations, and financial decisions.  

MBOs can occur for a variety of reasons, such as when the current owners of a company want to retire, or when they see an opportunity to sell the business to their management team. In some cases, MBOs may also be used to protect a company from being acquired by outside parties who may have different strategic objectives.  

They can be complex and require careful planning and negotiation. They may also involve legal and regulatory considerations too.  

For a business to be considered a good candidate for an MBO, some key questions need to be answered first:  

1 – Is there is a strong management team in place? 

2 – Does the business have a good record of profitability? 

3 – Are there good future prospects for the business? 

4 – Will the business be able to show solid future cashflows?  

5 – Does the seller have realistic pricing expectations?  

The first stage though is really to take a step back and consider the strategy and decide that an MBO is the right deal to undertake. There are of course other options open to the owners; one could be a trade sale of the business, or another could be the setting up and sale to an Employee Ownership Trust, which is similar to an MBO where some or all of the business is sold to the Employee Trust instead. I won’t cover these options this time, but we are available to discuss these options and will likely cover them in a future article.    

In terms of the process, we typically consider the stages as follows, and these are some of the considerations and discussions required:  

Stage 1 – Proposed Deal  

An outline deal between both sets of parties should be proposed to enable the whole transaction to be assessed to ensure its overall viability at an early stage. This will include how much of the business will be sold, the price and then outline terms on how and when that price would be paid, i.e., how much up-front and how much is deferred and how the deferred is calculated.   

Ultimately any deal will require funding and therefore the viability of the whole deal should be looked at very early on in the process.  

A valuation of the business will need to be agreed, but in most cases, this is not just driven by market forces, but also by the ability of the business/MBO team to fund the deal. Therefore, this part is not just a black and white valuation, but other aspects come into the proposed number.  

Considerations to be given to whether it would be a share or asset sale (in most cases we find it is a share sale) and what the structure might look like.  

Both parties will require advisors to assist in the process including tax advice.  

Stage 2 – Business Plans and Financials  

A detailed business plan and financial package will be required, and the latter will need to include assumptions, profit and loss, cashflows and balance sheets. It will need to include past, current and future plans.  

The plan will need to show how the management team will take the business forward.  

The business will need to be able to show the ability to comfortably service the level of debt funding requested, and this is where we use our knowledge and expertise to help determine this.  

Stage 3 – Funding  

Funding of the deal will likely be a blend of the following:  

  Company Debt (term loan/invoice finance/asset finance)  

  Mangement Input (cash/guarantees)  

  Deferred Consideration  

  Private Equity (where required)  

In terms of the debt funding, the amount the business will be able to borrow for the deal will to a large extend be based on what the business is able to service comfortably from its cashflows. However, lenders will also look at a maximum leverage ratio when considering MBOs, and this is a maximum multiple of adjusted EBITDA to the level of the debt.  

Funding MBOs is fairly specialist and there are not a huge number of debt funders out there, especially for the smaller deals. However, the ones that are active in the market are quite specialist, have a very good understanding of how these deals work, and have appetite for good deals. We have good relationships with all the MBO funders.  

Stage 4 – Deal Agreed  

This is where all the previous aspects all come together to negotiate a final deal, subject to due diligence. At this point draft documents will start to be circulated including a Sale and Purchase Agreement which will set out all the terms of the deal including warranties, and an Inter Creditor Agreement with the debt funder.  

Stage 5 – Due Diligence  

There will be the requirement for due diligence by the debt providers and/or the equity providers (where relevant). This will consist of legal, funding and financial. Planning in advance for the lengthy lists of information and analysis will save you a lot of time in the long run. 

Stage 6 – Deal Completion  

Once the due diligence has all been agreed to everyone’s satisfaction, then the deal can proceed to completion. It is worth saying that there will likely be a minimum of three sets of lawyers involved; one for the owner, one for the MBO team and one for the funders so all parties have to work together well to ensure a deal does not get bogged down in legal amendments back and forth.  

MBOs can be an attractive option for management teams looking to take more control over the companies they work for and for owners looking to sell their businesses to trusted and knowledgeable insiders. But they do need to be planned and good advice taken by all parties.  

An MBO is a complicated deal by its nature and has a number of parties involved. 

We at Snowball are very experienced in this field and happy to have a discussion with anyone looking for advice on the options, whether an MBO is viable and how deals can be structed and then funded.