30 corporate finance Should I consider a management buyout?


For the last three to four years, owners of businesses have delayed selling their companies hoping that valuations will pick up and banks will begin to lend again as currently, in the majority of cases, this is not happening, writes Chris Duggan of Griffins


Some business owners have reached or even passed 60 years of age, their pensions have matured and they are now thinking again of selling up and retiring but are finding it incredibly difficult. They may have already tried using a business agent, paying a fee in advance which can easily amount to £30-40k based on an excessive valuation. Unsurprisingly, the business does not sell. So what do these captive business owners do? Usually a new managing director is put in charge to run the business or it is sold to the existing management team. The question is then “to MBO or not to MBO”.


Reasons for an MBO • The process is within your control with no surprises.


• Most businesses that have directors/owners over 60 years of age will have significant balance sheet values which can be released.


• You know all the people concerned and can make the transaction happen.


• You can remain involved in some capacity and perhaps benefit from a third party sale in a few years.


• You can be more confident that you will receive any outstanding deferred payment.


• The management team can now employ more tax advantageous remuneration schemes which can in the future save the business money.


• Finally, you can retire and, in some cases, walk away without any future commitments.


Reasons against an MBO


• You will almost certainly under sell the value of the company.


• You will also probably be paid over a longer period of time than if a third party purchased the business.


• The business itself may become more highly geared as it takes on additional borrowing or reduces its reserves to fund the MBO and this can put future deferred payments at risk.


• The management team may have been with the company for years but are not entrepreneurs or natural leaders so future company performance may be impacted.


• After the purchase, there is a possibility of in-house fighting by the management team as


Thinking of selling your business?


Selling your business or looking for investors can be a complex undertaking. Yes, your buyer or investor will be interested in your company’s physical assets and its customer list, but they will also see your key people as an important part of their investment


It is to be expected, therefore, that your investor will see the retention of these key people as an important part of the onward success of the business. They are likely to include provisions within the sale or investment agreement to encourage these people to stay with the company, such as a provision for a claw back of cash or shares if such a person leaves within a specified period of time.


Such stipulations often include ‘good leaver/bad leaver’ provisions and the most important – and potentially contentious – part of the drafting comes in distinguishing between a ‘good’ and a ‘bad’ leaver.


A good leaver will normally get a better deal – he or she will not have to pay back as much of the cash consideration or will get a better price for any shares which have to be sold to the investor or the buyer of the business. A bad leaver on the other hand may find that they have to pay back a much higher proportion of the cash consideration and may only get a nominal amount for any shares they are required to sell. The impact on a bad leaver may be on a sliding scale depending on how long after the transaction they become a leaver.


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Normally, the agreement will define what constitutes a good leaver and then say that anyone who leaves and is not a good leaver is a bad leaver. You, and any other potential leaver, will therefore want the definition of good leaver to be as wide as possible (with your buyer/investor wanting the opposite of course!). Typically someone would be regarded as a good leaver if they left as a result of something over which they had no control such as death or serious illness. The leaver would also want the definition to include scenarios which could be manipulated by the new owners such as unfair dismissal or redundancy but this will require careful drafting – clearly the new owner or investor will not want someone who is sacked for gross misconduct being a good leaver.


Before signing up to good leaver/bad leaver provisions it is essential that you understand the implications which they could have in different scenarios. We have seen cases where the definition of good leaver has been so narrowly drafted that sellers who have left in circumstances which they had no control over have nonetheless faced claims to repay the whole of the price paid to them for their business.


there is now no natural leader in place so the only control is by committee, which again can impact on future performance.


• The management team may personally have to find additional funding and therefore they will have to draw additional remuneration from the company, again impacting on future profitability.


• If the business does not perform effectively then the new owners nearly always ask for the assistance of the original owner so you are back in the business again.


Each individual case has to be considered on its own merits, both personal and financial, so if you are considering an MBO work with your management team from an early stage so the process becomes a joint effort and not something they feel they are being forced into.


An important point is to get the right advice before you start the process. I have recently been involved in a number of MBOs so if you are an owner of a business or a management team contemplating a buyout contact me for a free initial consultation. In the right circumstances, this exercise can work.


Details: Chris Duggan 0118-9235020 c.duggan@griffins.co.uk www.grffins.co.uk


Derek Rodgers


For more information on this or any other advice on the law as it affects businesses see details below.


Details: Derek Rodgers 01635-508181 d.rodgers@gardner-leader.co.uk


THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER 11/JANUARY 12


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