Management Buy Outs (MBOs) Key Stages
Here are the key stages of a Managemet Buy Out:
- Evaluation of the Management Team – Evaluation of the strengths and weaknesses to determine whether the team is strong enough to lead the business and to win external backing. Any management gaps need to be filled or a strategy to fill them agreed.
- Business Preparation – Preparing the business information to be made available, including the Information Memorandum. This stage needs to be done thoroughly, enabling professional response to Due Diligence requests by the Managers or funding providers later.
- Funding assessment – Review of the business to understand the potential funding sources including term loans, lease finance, invoice discounting, overdrafts and also vendor finance.
- Heads of Terms – Negotiation of the Heads of Terms between the lead manager (MD to be) and the business Owner; this should include all major issues or contentious areas. It is much better to agree all key issues when only 2 main parties are involved than well into the deal when there may be between 4 and 6 parties negotiating (including each side’s lawyers).
- Business Plan – the MBO team will prepare a narrative and financial business plan which needs to professionally put across the case for external funding. For tips on preparing professional business plans click here.
- Scope Legal work – draw up the scope for legal work required. This involves determining which legal agreements are needed and what protection is needed for the existing Owners and for the new Manager Shareholders.
- Tender Legal work – the Owners and MBO team should then tender the legal work to selected Corporate Lawyers who have good experience of doing deals; a poor choice of lawyer acting for either party can wreck your deal.
- Due Diligence – the MBO team will want to conduct due diligence, particularly into aspects of the business that they have not exposure to before; however the level of due diligence is likely to be very much less extensive than if an external purchaser was conducting this.
- Warranties & indemnities – the MBO team will need to carefully consider what warranties and indemnities it requires, although clearly these should be substantially less than with an external purchaser.
- Working Capital review – The MBO Directors need to be comfortable with the working capital to ensure that the new business will have adequate funds to meet anticipated cash requirements.
- Bank Tender – the MBO team will wish to secure bank funds to either supplement PE funds or to provide for all cash requirements. A professionally run bank tender will achieve the best facility and terms for the MBO business.
- Beating Budget – it is essential that that the Owners and MBO team remain focussed on the ongoing business and that they continue to meet all published Budgets and forecasts. MBO teams which use a part time FD to help project manage the deal process find this much easier, and this in turn improves the chance of the MBO occurring very significantly.
The addition of a part time Finance Director from vfdnet made for a cracking management team to negotiate and complete our MBO. Although the MBO process was uncertain and difficult at times, vfdnet ensured that we remained focussed on forging ahead with the business, and really helped make the deal happen. With a strong market position as a leading waterless printer, together with a highly motivated management team that owns the business we now look forward to the future with confidence
CEO, Successful SME Printing Business