What is the process of an MBO?
The management buy-out (MBO) process generally comprises several vital stages: planning, negotiations, financing, due diligence, legal documentation, and post-transaction management.
While it may seem complex, a proficient Corporate Finance advisor can help you navigate this process and collaborate with vendors, advisors, funders, and solicitors.
Here’s an outline of the typical steps involved in an MBO:
- Planning
The management team interested in the MBO formulates a comprehensive plan that details the proposed acquisition. This plan encompasses the desired ownership structure, the composition of the MBO team, the company’s valuation and purchase price, the financing strategy, and the plans for post-acquisition management and operations. - Negotiations
The MBO team, often with the assistance of advisors, assesses the company’s value and fundability. After, negotiations begin with the existing owners or shareholders. The goal is to agree on the purchase price, transaction terms, and other crucial parameters; all benchmarked to reasonable value and fundability. - Financing
Once the purchase price and terms are mutually agreed upon, MBO advisors identify financing sources to secure the requisite funding for the acquisition. This funding is essential for executing the purchase, sustaining working capital, and demonstrating compliance with senior debt covenants. Securing funding may entail obtaining debt financing, equity financing, or a blend of both, necessitating thorough financial analysis to structure an appropriate funding package. - Due Diligence
This phase involves an extensive examination of the company’s financials, plans, and other pertinent information to evaluate risks and opportunities. It validates the assumptions and financial projections underpinning the acquisition plan and uncovers any potential issues that could impact the transaction or post-acquisition operations. Lenders may request independent due diligence from a third party, typically accountants, to assist in lending decisions. - Legal Documentation
Legal documents are prepared and executed to formalise the MBO transaction. These documents may include sale and purchase agreements, shareholders’ agreements, employment contracts, and other legal instruments outlining the rights, responsibilities, and obligations of the involved parties in the MBO. - Post-Transaction Management
Following the successful completion of the MBO, the management team transitions into the post-acquisition phase. They execute the plans outlined earlier and take charge of the company’s ongoing operations and financial performance.
It’s essential to recognise that the duration of the MBO process can vary depending on specific circumstances, the size and complexity of the target company, and the efficiency of the legal processes on both sides.