There has been increased interest in management buy-outs (MBOs) recently due to lower valuations and fewer third party buyers in the market.  It may be the right time therefore for employees to consider acquiring the business in which they now work.  Employers are sometimes more amenable to selling to their managers/employees rather than to a third party for a number of reasons:

• Managers know the business and are key to its success;
• A sale to management should ensure a seamless handover, with limited interruption to business;
• Managers are likely to accept more of the commercial risk in buying, given their extensive knowledge of the business;
• Confidential information will not be disclosed to competitors; and
• The economic downturn has reduced the number of third party buyers.

In terms of structuring, a typical MBO transaction will involve third party investors (usually private equity firms) who take a stake in the business alongside the MBO team by subscribing for shares in a newly incorporated company which in turn purchases the target group. The investors seek assurances (in the form of warranties and indemnities) from management relating to the business of the target group, they seek representation on the board of directors and usually have vetoes over important business decisions of the new group.  They also seek lock-in covenants to prevent management from exiting for a fixed period, anti-dilution rights and other covenants designed to ring-fence and protect their investment as much as possible and generate a return within a set period. If professional investors are involved, they typically have standard procedures, documents and business models which they will seek to impose.  

Traditionally, banks have been an important source of funding to MBOs. Now the level of bank debt tends to be matched by the subscription funds from investors and management to provide the purchase price for the target group and some working capital for the business going forward. It is important to have funding lined up in advance, as in the current climate it can be difficult to secure funding within the required timeframe.  Bear in mind that the seller will usually try to sell quickly and will want to receive all (or as much as possible) of the purchase price on completion rather than entering into deferred consideration or earn out arrangements.

The entire process requires considerable time and resource commitment from management but, if they are well prepared and there is a firm commitment from the other parties from the outset, it may be possible to move swiftly through the process with limited interruption to business, which in turn should lead to a successful sale.