Management Buyouts

A management buyout lets a team who already know the business take it over from the current owners. It’s one of several options for an exit, and we have the experience and sensitivity to guide either side, the selling shareholders or the management team, through a process that takes careful planning.

We advise on the structuring, negotiation and implementation of an MBO, acting either for the management team or the selling shareholders. An MBO is usually carried out through a newly incorporated acquisition company, set up by the management team, which buys either the shares in the target business or its business and assets. The right structure depends on corporate, tax, funding and risk considerations, including the target’s existing share capital, articles of association, shareholder arrangements, distributable reserves, banking facilities, key contracts, and any restrictions on transfer, assignment or change of control.

Our work typically covers the transaction planning and pre-completion steps: incorporating and capitalising the acquisition vehicle, subscription arrangements, board and shareholder approvals, Companies Act compliance, authority to allot and issue shares, share transfer mechanics, statutory registers and Companies House filings. We also prepare and negotiate the main acquisition documents, including heads of terms, confidentiality agreements, due diligence questionnaires, share purchase or business purchase agreements, disclosure letters, tax deeds or covenants, contribution or rollover arrangements, loan notes, deferred consideration provisions, security documentation, investment agreements, revised articles of association, shareholders’ agreements and completion deliverables.

MBOs need a detailed allocation of risk between sellers, management, the company and any funders. We advise on warranty and indemnity structure, disclosure strategy, limitations on liability, knowledge qualifications, restrictive covenants, non-compete and non-solicitation provisions, completion accounts, locked-box mechanisms, earn-outs, vendor finance, intercreditor priorities, and how the acquisition funding interacts with how the company is governed after completion. We also review corporate authority, conflicts of interest, directors’ duties, intra-group arrangements, employee participation, property and asset transfers, intellectual property ownership, key customer and supplier contracts, regulatory consents and any third-party approvals needed to make sure completion is both legally effective and commercially sound.

Advantages

• Continuity: the buyer already understands the business, its people and its risks, which often reassures owners who built the business up over years and want to protect what they’ve created
• Less disruption: goodwill and day-to-day operations are more likely to hold steady than during a sale to an unfamiliar third party
• Smoother due diligence: the management team’s existing knowledge can speed things up, though formal legal, financial and tax due diligence is still required, which can also give comfort to any lenders involved
• Confidentiality: there’s no need to share sensitive information with a wide pool of outside buyers
• Succession: an MBO gives owner-managers an exit route while keeping the culture and the team that built the business, and sellers can sometimes stay involved in a different capacity

Disadvantages

• Funding: management teams often need external debt, private equity, vendor finance or deferred consideration, each of which can affect control and how quickly the deal completes
• Price expectations: sellers may want full market value, while management may push for a price reflecting the deal’s risk and their own contribution over the years
• Conflicts of interest: directors involved in the buyout have to balance their duties to the company, the conflict between their buyer and director roles, and any imbalance of information between management and selling shareholders
• Limited warranties: sellers may be reluctant to give extensive warranties when the buyers already know the business inside out
• Execution risk: the deal can depend on lender approval, shareholder consent, key contract consents, employee issues, property matters and satisfactory due diligence, any of which can delay or derail completion

An MBO works best when sellers, management and funders agree on how risk is shared before the structure is set.