What is a management buy-out?
23 May 2019 by Andreea Brindas
Are you a part of the management team or management board of a company? If you’re a director, and wish to become a shareholder in addition to your directorship, there are a few ways to achieve this. One way may be a management buy-out; this is where the owners of the company are selling its entire issued share capital (i.e. share sale). This blog sets out a brief overview of a management buy-out.
(N.B. The alternatives to a management buy-out are a management buy-in; or a combination of the two (known as a buy-in management buy-out). However, these topics will not be addressed in this blog).
A management buy-out takes place where the existing management of a company or business (i.e. usually its board of directors or part of them) acquire the company (being all of its issued share capital) or business (including part of the business on an asset-transfer basis) being sold from its existing owners.
The parties involved in a management buy-out would naturally be the management team of the company being sold. Which are more often than not, its board of directors or part of them, (the management team), the current owners of the company (sellers), the company being sold (target), and often a private equity fund, a bank and either one or two new shelf companies, used as acquisition vehicles.
The management team would normally invest their own capital to acquire the target. If the capital raised isn’t enough to cover the full purchase price, it’s likely that a private equity fund, or bank, will be involved in the transaction. This would be purely from a funding and security perspective.
For more information in relation to what a private equity fund is, please refer to our previous blog available at: https://www.fjg.co.uk/blog/2019/05/21/what-is-a-private-equity-fund
The private equity fund (if involved) and management team (directors) will invest money in the company by acquiring the target; through either its shares or part of its business by asset transfer. Meaning that they will have a respective shareholding in the target post-completion or own the business/part of the business purchased. It’s important to note that investments by private funds are likely to be greater than investments from the management team. This is normally the case in larger corporations where the management team cannot fund the full purchase.
A bank would normally be involved to cover any ‘gap’ in the purchase price. This happens when the management team and the private equity fund’s combined contributions weren’t enough to cover the purchase price. The bank will therefore invest money in the company, often by way of a loan. It will also most likely require securities and guarantees to secure such loan.
The benefits of a management buy-out include, but are not limited to:
- Incentives to the management team. A management buy-out usually offers a mechanism whereby the management’s team proportion of the equity on an exit will be adjusted according to the actual success of the bough-out business and its value at the exit.
- Growth. Following the incentives set out above, the management team’s objective will be to ensure the company is performing well and growing as they are now more heavily involved and indeed, dependent on the success of the company/business.
- Sustainability. As the company is being taken over by its current management team, there is likely to be a smooth transition and continuity of the business to allow for seamless operational succession.
- Usually a sensible option for banks and investment funds; and
- Tax reliefs- B. An accountant will be best placed to advise you in relation to any tax reliefs/liabilities applicable on a management buy-out.
The Corporate Commercial Department here at Fisher Jones Greenwood LLP can guide you through management buy-outs, management buy-ins or a combination of the two; as well as assist you with the preparation of any documentation required.
Should you require any further information or assistance please do not hesitate to contact us by calling 01206 700113 or email [email protected].