What is the process of a MBO?
The management buy-out (MBO) process generally involves several stages: planning, negotiations, financing, due diligence, legal documentation, and post-transaction management.
This may sound onerous, but a good Corporate Finance advisor should be able to guide you through the process and work with vendors, advisors, funders and solicitors on your behalf.
Here is an overview of the typical steps involved in an MBO:
Planning:
The management team interested in the MBO develops a plan that outlines the proposed acquisition, including the desired ownership structure, who the MBO team will be, the valuation and purchase price of the company, the financing strategy, and the post-acquisition management and operational plans.
Negotiations:
The MBO Team (or their advisers) will indicate the business’s value and whether it can be funded. Then would commence negotiations with the current owners or shareholders of the company to agree on the purchase price, terms of the transaction, and other keywords. These would be benchmarked to reasonable value and fundability.
Funding:
Once the purchase price and terms are agreed upon, the MBO advisors work to identify financing sources to secure the necessary funding for the acquisition. Funding is needed to make the acquisition, provide working capital and headroom, and demonstrate that senior debt covenants can be met. This may involve obtaining debt financing, equity financing, or a combination of both, and requires extensive financial analysis to structure a suitable funding package.
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Due Diligence:
This involves thoroughly reviewing the company’s financial: planning and other relevant information to assess its risks and opportunities. This helps the management team to validate the assumptions and financial projections used in the acquisition plan and to identify any potential issues that may affect the transaction or the post-acquisition operations.
Lenders may require external due diligence from a 3rd party (usually accountants) to provide an independent assessment to assist with their lending decision.
Legal Documentation:
Legal documentation is prepared and executed to formalise the MBO transaction. This may include sale and purchase agreements, shareholders’ agreements, employment agreements, and other legal documents that outline the rights, responsibilities, and obligations of the parties involved in the MBO.
Post-Transaction Management:
After the MBO is completed and the champagne corks popped at completion. The real work commences, and the management team implements the post-acquisition plans and manages the company’s ongoing operations and financial performance.
It’s important to note that the length of the MBO process can vary depending on the specific circumstances, size and complexity of the company being acquired, and the relative efficiency of both sides’ solicitors.