Management Buy-Out (MBO) Process

The MBO can last anywhere from three months to a year or even more. The following are the steps involved in a typical MBO. In some cases, some of the steps may not apply and also the order does not necessarily indicate the timing. A lot of issues outlined below would be dealt with simultaneously.

STEP 1 - Initial Consultation

STEP 2 - Making the First Approach
Who within an organisation to first approach about a possible MBO is vital. Generally speaking, you will have a good idea who the most approachable person is. You may already have an indication of the shareholders willingness to sell. It may be a case that the existing shareholders / management have approached you with a view to considering an MBO. In an extreme case if you approach the wrong person they immediately may regard you as a threat and this could have consequences for your existing position.

STEP 3 - Confidentiality Issues
In order for you to be able to talk to your professional advisors, the target company will require you to sign a confidentiality agreement so certain information can be released to your professional advisors and yourself. Depending on your current role and responsibility within the organization, you may be required to step aside from certain duties and not attend certain board meetings if you are a director.

STEP 4 - Deciding on the MBO Team
Generally, MBO's are driven by one to two senior management. An important part of the process is to try to determine what other key members of the management team you should include. The possible negative effects of not choosing certain members will have to be examined and the split of shareholding between the management team will have to be agreed.

STEP 5 - Valuation and Negotiation
Following the receipt of financial information about the company, we will prepare valuations with a view to the commencement of negotiations with the seller. The seller will generally appoint their own advisors to assist them in the negotiations. While historical financial information is important, the future trading prospects of the business and cash flow supported by a business plan will underpin the valuation. The negotiation process will take place between the company's advisors, the shareholders, the management and their advisors. It is important to point out to the target company the advantages of a management buyout, e.g. reduced due diligence and warranties, the importance of any management in a potential sale, etc.

STEP 6 - Business Plan
The business plan is important broadly for the following reasons.

• Assist in the valuation
  
• Set out very clearly the objectives for the next three to five years.
  
• Assess the funding requirement.
  
• To assist in getting investment and bank funding.

STEP 7 - Heads of Agreement
When a valuation has been agreed, a Heads of Agreement is prepared which deals with the offer and any conditions that may attach. Conditions include; the right to due diligence, confidentiality and an exclusivity period, giving the management an agreed time to complete the deal. You may also be asked for evidence of your ability to raise the necessary funding to complete the deal.

STEP 8 - Legal and Tax structures
The structure of the company post MBO has to be agreed from a tax and a legal point of view. Management, employment, and shareholder agreements will be prepared.

STEP 9- Sourcing of Finance

STEP 10 - Due Diligence
Due diligence includes the following:

• Financial due diligence to ensure that the financial information given is correct, and adequate internal control exists.
  
• Tax due diligence to ensure that any tax liabilities are complete
  
• Legal due diligence to ensure the buyer is aware of all title issues, legal agreements, contingent liabilities, litigation etc.
  
• Environmental - if the business was involved in anything that could damage the environment and result in potential liabilities
  
• Pension schemes, type, entitlements and adequacy of funding.
  

STEP 11 - Suppliers and Customers
A communication strategy should be planned with suppliers, customers and employees. The continued support of suppliers and credit facilities has to be ascertained. It may be necessary to outline the details of the MBO to major suppliers.

STEP 12 - Finalisation of funding
Agreement with investors and bankers in relation to terms and conditions attached to the funding.

STEP 13 - Agreements
The solicitors for both parties will go through the process of agreeing purchase agreements and if there is investors, share subscription agreements will be prepared. These can require substantial negotiation to take into account any potential warranties or indemnities that you may require the company to give you or that the investors may require management to give.

STEP 14 - Completion
A designated date is usually set for completion where all agreements are signed, funds passed and you take ownership of the company.