15 September, 2016 | Bret Gower
Article updated May 2024
The common denominator among most businesses that participate in a management buyout is that the businesses are long established, with a proven track record in both business management and financial management so that the bankers proposing to lend the money to the management team for the buyout of the existing proprietors can be confident about the company’s future. Ideally the existing proprietors will have identified the likely purchasers within their business and will have formed a plan for a staged exit that maximises their return and minimises the risk to the incoming purchasers.
Very often there are multiple tiers of lending. The first tier of lending is provided by the banks who may lend to say 50% of the net assets of the business, the outgoing proprietor might stomp up say 25% of the price by way of vendor loan, with the incoming management team funding the balance of the purchase by providing mortgages over their homes or other securities that the banks are prepared to accept.
The legal documentation for a management buyout will comprise:
The Agreement for Sale and purchase will specify the price, how the price is to be paid and the warranties concerning the past management and performance of the business. These warranties are provided by the outgoing proprietors. There may be warranties as to the tax position of the company and matters relating to the company known only to the outgoing proprietors but that should be disclosed to the management team.
The shareholders agreement on the other hand will record the rules as between the new shareholders in the business in terms of the capital structure of the business, its governance, managing risks, the employment expectations of each of the principal participants in the buyout and an agreement in respect of exit from the business should one of the new owners at any time decide that they want to leave the business.
Smith and Partners are able to advise on management buyouts from beginning to end and are happy to discuss with the participants at an early stage their proposals in respect of a management buyout — and to put them in touch with other people who will help such as bankers and accountants so as to form a professional team tasked with getting the deal across the line.
If you are interested in pursuing a management buyout of the business you work for, or are a business owner wanting to sell your business in this way contact commercial team director, Bret Gower on 09 8376893 or email bret.gower@smithpartners.co.nz.
Get expert advice on management buyouts – contact commercial team director, Bret Gower today to set up an appointment.
