For entrepreneurs looking to take a step back from their business, a management buyout (MBO) might tick a lot of boxes. As well as rewarding employees, the most suitable buyer might come from within the company. However, it’s still a commercial decision, and traditionally the interests of all sellers haven’t always been automatically aligned, which is why there’s been a push over recent years for management sellers leading an MBO to employ independent legal and corporate finance advice.
It is, of course, possible for MBOs to be struck without management seeking independent legal and corporate finance advice in relation to both their sale side and buy side terms, but doing so mitigates the risk of conflict arising. For the benefit of both the selling entrepreneur and the management sellers, these parties receiving separate advice can help ease conflicts in relation to (among other key issues) questions around who gives warranties (statements as to the state of affairs of the business), who accepts liability for them, and what obligations the relevant parties are prepared to accept. It helps avoid the risk of any argument that the management sellers have been pushed into accepting something that isn’t in their interest. The sellers and management in an MBO will have different interests, for example, whether it’s the amount of cash versus shares, ongoing employment terms, and how and when the founders leave the company following completion.
The sale side corporate finance advisers are mandated to secure sale terms, not necessarily to secure all the management terms on the MBO.
During an MBO there are many key terms for management to settle. These issues include what interests you roll into and the terms that apply to those interests, leaver provisions (what happens to and what value you receive for your shares should you leave the business), bonus arrangements, share options, as well as other minority protections, including anti-dilution provisions, which protect management from equity dilution. In deals, as in many things in life, timing matters. Separating advice will help to ensure management pushes for what they need at the right point. Otherwise, their priorities risk getting relegated and not raised early enough. Further down the line on an MBO, you are likely to have less leverage, and expectations are more easily dismissed.
Every transaction is different. It is very important to understand what your clients, each manager as an individual, and the management team as a whole, want from the transaction, as well as the specific dynamics of the deal, so that all parties involved are satisfied with the outcome.
Politics has been described as the art of the possible and deal-making is much the same. Too often, selling entrepreneurs and management sellers are artificially constrained by what people say is the market norm. It’s not about winning all the points, it’s about winning all the important points. Employing independent legal and corporate finance advice will help to achieve this.
Simon Sale is a partner in Mishcon de Reya’s Private Equity group, specialising in founder and management advisory.