Is Management the key to an MBO?
"Yes, management is important in a management buyout (MBO). An MBO is a type of corporate transaction in which a company's management team purchases a significant portion of the company from its owners or shareholders. The management team typically includes the company's top executives and key managers. In an MBO, the management team assumes control of the company and is responsible for its strategic direction, operations, and performance. As such, effective management is critical to the success of the MBO and the ongoing success of the company."
The answer above was not written by me, but by Open AI's ChatGPT, an Artificial Intelligence text generator based on the Open AI's GPT-3.5 (Generative Pretrained Transformer) language processing module that was released into the world late last year – not a bad answer, but I might have looked at it from a slightly different perspective:
"Management is the most important player in any Management Buy-out – the clue is in the title. Capital, whether the equity or debt kind, used to finance the buy-out is more of a commodity for any particular MBO. It makes little difference which club of banks provides the debt and, whilst the equity providers can, and often do, add value after the deal is done, they wouldn't be in the deal if they did not believe the Management team could deliver."
I hope AI text generators won't do us lawyers out of a job just yet; I’ll leave you to be the judge.
So does this give the Management power in negotiations?
Yes, and no (my answer, but then I'm a lawyer).
Management is at its most powerful before a PE house is chosen as the equity provider. Until this is done, the competition between PE houses gives Management its opportunity to get the best deal they can. Once you are further down the track, with an agreed package, it can be difficult, if not impossible, to renegotiate terms.
Having said that, deal dynamics often change during the MBO process and, as always, the devil is in the details of the wording of the final documents (of which there are many), so expert advice is a must, even once the commercial parameters have been agreed.
Negotiating an MBO from the Management end
As a former Chartered Account, Corporate Finance adviser and Private Equity investor, I have sat on most sides of the table when it comes to MBOs. Now practising law, I believe I can bring a holistic perspective to the negotiations on behalf of Management Teams and seek to guide them through what is often the most stressful period of their lives – alongside buying a house, getting married, having kids and all the usual other lifechanging moments.
The elements for Management to focus on in the buy-out are:
- Quantum and form of Managements' investment
- The capital structure generally
- "Sweet equity" as an incentive for Management
- Vesting terms and periods
- Leavers: what happens if you leave the team?
- Governance: who actually runs the business? Are there to be veto rights?
- Tax: there's always tax and we can help with that too
- Warranties the Management will be asked to give to the PE House
But there are also: service agreements, restrictive covenants, who pays for the advice, fees charged by the PE House, etc…
We like to act for management teams and believe we have the experience to enhance your buy-out experience and outcome. Do get in touch.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.