What Is A Management Buyout?
15 September, 2016 | Peter Smith
A management buyout is when employees of a business – usually executive directors and/or managers purchase the business.
What are the other options for selling a business?
A management buyout is just one of the options that are open to the proprietors of a company when the proprietors are considering their succession plan. A management buyout can be compared to the other options such as:
- An open market sale.
- Finding a partner to acquire part of the business with the object of buying out the proprietor over time.
- Preparing the business for a public listing on the Stock Exchange.
- Selling the business to a private equity company.
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 are confident about the company’s future.
Very often there are two 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 will stomp up say 25% of the price by way of loan, with the management team together finding the balance of the purchase by providing mortgages over their homes or other securities that the banks are prepared to accept.
The documentation for a management buyout will comprise;
- an agreement for sale and purchase of either the shares in the company or the assets of the business; and
- a shareholder agreement reflecting the agreement between the management team that will be completing the buyout.
The Agreement for Sale and Purchase
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
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: