Our solicitors can offer legal help for management buyouts

What are management buyouts?

Management buyouts (MBOs) occur when the existing management team at a company acquires all or part of the business from its owners.

This form of acquisition was popularised in the United States during the 1980s, when owners of various types of organisation opted to sell to people within their business rather than seeking external investment.

MBOs are normally associated with larger organisations, and can occur when an owner wishes to free up their time and/or capital, or relinquish responsibility entirely.

However, MBOs can serve a number of purposes and benefit companies of all sizes. For example, if a partner in a small business wishes to step away from the company due to a dispute or a lack of shared goals for the firm, a management buyout can be a mutually beneficial way to resolve the situation.

What is required for a management buyout?

If the management and owners of a company agree that an MBO would benefit the business, and all parties are in favour of the buyout taking place, then the first step is to create a watertight plan that protects the company during and after the buyout.

The skills and experience of the leading managers will be put to the test during the buyout, which will be likely to involve the creation of a new management structure and potentially a new shareholder’s agreement.

The plan for the buyout must make provision for the new division of leadership, while taking into consideration issues such as retirement, illness and death.

All of these are areas where a lawyer may be especially helpful to ensure you don’t make any costly mistakes.

What is the cost of a management buyout?

In order to minimise the financial impact on the business, companies can seek assistance from a lender when planning a management buyout.

Before agreeing to finance a buyout, a lender will seek to investigate the future profitability of the business, and it is vital that you have a business plan that demonstrates your track record of success as well as a clear path of progression when you apply for finance for your buyout.

Some MBOs involve contributions from within the company’s management, but this increases the level of personal risk involved in the buyout, and alternative options can be preferred.

Financing options for your MBO might include investment from a venture capital fund or wealthy individual, with equity in the company offered in return for buyout funding. Alternatively, you might be able to use unpaid invoices to obtain a bank loan, or you could borrow against any assets owned by the business.

I want to know more about management buyouts – what should I do next?

Speak to us today for a free review of your legal requirements.

Carrying out due diligence is the first – and perhaps the most important – step of the management buyout process. 

Legal documentation will be required to detail the terms of the buyout agreement, and further documents such as new share purchase agreements, disclosure letters, bank funding documents and shareholder agreements will need to be drawn up before the deal is completed.

Contact us to discuss how we can help you through all the aspects of a management buyout.