Legal advice: Management buy-outs

If the situation ever arose, could you stage a management buy-out? Would you know how?

By Sheldon Cordell of thePublican.com's team of legal experts from London solicitors Joelson WIlson.​

Have you ever thought about becoming your own boss? Given the right circumstances why not consider a management buy-out (MBO)? The conditions for entrepreneurial executives and managers to carry out an MBO are good, prices are low, raising money for solid projects is not difficult and venture capitalists are looking for a secure home for their money.

Your current business owners may be more keen on the idea than you might imagine. Sellers are often keen on a sale to existing management because of the confidential nature of such a transaction, the knowledge of the management team, and the practical simplicity of dealing with those you know.

Bringing an MBO to fruition is nevertheless a complex corporate finance transaction and requires considerable, careful prior preparation. The choice of appropriate professionals who have "been there before" is vital. All parties must work in harmony. The legal and financial red tape which surrounds an MBO transaction can become very tangled. Adequate planning is a must.

The players​

• Management team​

It is often said that it's "better to back a good management team in an average business than a good business with an average management team". It is fundamental that the team is complete in all areas and able to take on the challenge - it needs to be sound, well balanced and capable of delivering the business plan. It is the management team and the business plan that would-be investors buy into.

Proposition​

While the management is crucial, venture capitalists look for a substantial capital growth in their investment. This is the so-called "exit" requirement. There are very few businesses that cannot be the subject of an MBO but they must be able to demonstrate that there is a real opportunity to grow and deliver value to their investors. If your plan is not well thought out or has no commercial substance, your potential investors will walk away.

The sellers​

One of the most difficult elements to manage in the MBO process is the first approach to the owners. A premature approach can cause all sorts of difficulties (legal and, just as importantly, practical). Without knowing if the owners are interested in selling, there is little point in embarking down this road.

Permission​

There are serious conflicts of interest that have to be managed during the process. Without permission, spending an enormous amount of company time trying to fulfil your ambitions could ultimately end in disaster.

Capital required​

You will be expected to invest some personal wealth to show your commitment. A venture capital investor will want you to invest what is commonly known as "hurt money" so that you can share the pain and show that you are serious. You may, for example, have to borrow money by giving security (eg a mortgage over your home). However, all the interest paid should qualify for a tax deduction.

Leadership and unity​

Ensure you have a clear leader to unite the team and that all members of the team know what their individual roles are. The team should speak with one voice, but each member should be able to demonstrate expertise in their own area. Backers need to know the team is well balanced and has a clear direction. If there is a suspicion that it is not cohesive and focused on the same goals, investors are right to have doubts about the viability of their investment.

Advisers​

Whatever you may hear to the contrary, MBOs are complex, need careful planning (particularly from the tax angle) and involve several different parties all with their own private agendas and their own legal and financial advisers. You need to make sure you have a team of dedicated legal, tax and corporate finance advisers to guide you and, where necessary, to stand up for the management team. There is still a business to run. Appointing advisers also sends out the signal that you are serious about your intentions.

Luck!​

At the end of the day getting the right deal agreed and getting it implemented needs skill and luck. So in any event, good luck!

Pictured: An MBO is worth raiding the piggy bank for in the right circumstances.​