Management Buy-Outs & Buy-Ins

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A MBO is where the existing management team of a company acquires all, or sometimes a majority, of the shares in a company from the existing shareholders. The existing management team have the advantage of their personal knowledge of the company and existing relationships with the customers and employees. Usually, the purchase is supported by external investors such as a private equity firm.

A MBI is where an external management team purchases all, or a majority, of the shares in a company. This will usually result in an exit of the company’s existing management team with the incoming management taking over both the ownership and running of the company.

From the managers’ point of view, their purchase of the business that they have been involved in running can be beneficial for a number of reasons, including:

• Control - the management team may be involved in the operations of the company but not necessarily in the fundamental decisions being made. Frustrations may arise when the managers do not agree with the high-level matters being made and the plans for the company’s future. By pursuing a MBO, they will have control of the company’s future.
• Personal knowledge of the company - the existing management team will most likely be heavily involved in the day-to-day management and operation of the company. It will therefore allow them to have the expertise to run the company from day one of their acquisition.
• Existing relationships with employees and customers - new owners can often struggle with building relationships with the staff and clients of a company and this can sometimes have an adverse impact on the company and its growth. However, the existing management team will already have the personal relationships with the employees of the company and may well be the personal contacts with many of the customers, suppliers and clients of the company. The level of familiarity with these stakeholders will most likely reduce the impact they feel after the takeover.
• Investment opportunities - private equity investors can view an MBO has an attractive transaction to invest in as the new shareholders will have the expertise and knowledge of running the company first-hand.

As with any transaction, there may be disadvantages that should be considered, including:

• Consideration received by the seller - whilst a benefit of an MBO for the seller can be the continuation of the company’s management and leaving it in the hands of people you trust, it could result in a reduced sale price for the outgoing shareholders because the existing management team may not be able to pay full market rate.
• Transition from management to ownership - whilst the management team have the knowledge and experience of dealing with the day-to-day operations of the company, the running and ownership decisions of a company can require a different thought process, essentially as the management will have a personal interest in the success and profits of a company as an owner. Sometimes this transaction is not successful, and it can lead to a clash of interests with any second-tier management team and, indeed, the employees, due to the existing personal relationships.

MBOs are often funded by a variety of sources. The management team will typically invest their own capital into the transaction, often supported by debt finance (loans) and/or external equity investors, such as a private equity firm (who contribute funds in exchange for an ownership stake in the company).

They are usually very important in financing the acquisition and may also provide strategic guidance and expertise. However, it is important to note that their level of involvement may extend beyond that of a silent partner, contingent upon the amount of capital they contribute to the MBO.

Our corporate team at TWM have a wealth of experience in advising on and facilitating management buy-outs and management buy-ins.

Whether you are the exiting shareholders or the management team acquiring the shares, we will provide focused and practical advice throughout the course of the transaction, through the heads of terms, due diligence, finance, disclosure and negotiation stages and through to completion.