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Exploring your exit options: Management buyouts (MBOs)

Tuesday 14 January 2020

Growing a successful business can often be a lifetime’s work. But what happens when you’ve realised your growth ambitions?

As part our Exploring Exits series, we are delving into the options available to business leaders wanting to plot out the best exit route for them, taking in companies of every size and sector.

In this article, Emma Thomas explores management buyouts (MBOs) as a route to exit and weighs up the associated benefits and drawbacks.

What is an MBO?

A management buyout is the sale of a target business or company to the existing management via a transaction known as a management buyout (MBO). The management team will typically gather together resources and funding to acquire a business, and this may come from a range of personal resources, private equity backing as well as seller-financing.

What are the positives of an MBO?

One of the biggest selling points of an MBO is that the existing management team understands the business and often will already play a key role in overseeing day-to-day operations.

An MBO will also avoid the disclosure of sensitive business information to trade competitors.

Given the management team's familiarity with the business, the seller will often expect the management team to accept a greater degree of business risk than perhaps other prospective buyers would be prepared to accept and so obtain a cleaner break, and perhaps even a higher price.

What are the negatives of an MBO?

Although MBOs are undoubtedly a viable exit strategy, for some they also contain risks, particularly for management.

Some of the issues that frequently arise include the scope of the warranties which the management team may have to give and the related disclosure exercise. The giving of warranties is in many cases the most contentious area for management on an MBO. It can pit them directly against both the seller and the private equity investor.

The typical terms for management's equity investment can also pose a complex issue. The commercial terms of an MBO will typically be catered for by issuing different classes of shares to management on the one hand and to the private equity investor on the other. However, management will have certain specific rights and limitations attached to their shares, including ratchets, transfers, leaver provisions, exit-related rights, step-in and enforcement rights. The tax treatment of management's equity investment is another important factor to consider.

Alongside this, reconciling management's participation in an MBO with their existing duties as directors and employees can sometimes pose a challenge, as will the terms of any new employment arrangements.

Emma is a solicitor in Brabners’ corporate team. She regularly advises on mergers and acquisitions, investment fundraising, company reorganisations and family investment companies. She acts for a range of clients including SMEs, start-ups and large nationals as well as a number of clients in the technology and sport sectors.


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