Management Buyout

[BubbaWY]

Morning all, I am looking for some advice if possible please?

I have been working at my current company for a couple of years and are part of the senior management team. The company has been going 30+ years, is well established, has a good reputation and is financially in a solid position.

The owner has decided to retire and myself and a colleague and looking to carry out a MBO. We are putting up some funds initially and the rest of the buyout will be through (hopeful) profits with an aim of completing the buyout in 5 years.

There will be full transparency, but I was wondering what exactly I should be looking out for from my point of view to minimise risk. Obviously I need to fully understand the current financial position, assets, liabilities, etc but any advice would be appreciated.

 

[Mr D]

Figure out how the current and next few years are going to impact the business. Figure out how Brexit will impact the business, how the recession / depression will impact, how the virus will impact. Look at what impact lockdown had, figure it may happen again on local or national basis.

And factor in higher taxes both for your business and your supply chains to pay for this year.

You will be wanting expert paid advice regarding the business buyout. And use your own lawyer.

 

[BubbaWY]

Thanks for the reply. Would you suggest I need my own lawyer, or one to look after both mine and my colleagues interests?

 

[Clinton]

Obviously I need to fully understand the current financial position, assets, liabilities, etc but any advice would be appreciated.

No, you don't. You need to hire someone who does.

You cannot "fully understand" the matter, not unless you're an experienced corporate finance professional yourself.

You need both a good accountant and a good M&A lawyer (and preferably also a savvy business broker type person to advise on strategy and price and do negotiations ....but you're unlikely to find one of those and I'm fully booked up so can't offer to help you).

You need expert accountants not just to explain the finances to you but also to find the flaws, dig out hidden liabilities that don't appear on the balance sheet, do forensic work on figures from the past, ensure past commitments on PAYE, VAT, CT etc were properly calculated etc etc. There's a ton of stuff that needs to be done.

Then there's the putting the deal together. Remaining price doesn't have to be paid just from future profits. There are lots of ways deals can be structured. I won't go into a lesson here but having good advice in this area will save you a ton of money not just on the purchase price but also in tax that you'll pay over the next several years.

And there's a lot of legal work, from due diligence to a solid Share Purchase Agreement to any other legal contracts that need to be drawn up to provide the vendor with security - a PG from both you buyers, a debenture on the company, all sorts. So you need a good lawyer.

Don't expect advice to be cheap. Expect to pay a considerable five figure sum. And that's just on the lawyer (and before you start paying accountant / corporate finance people).

Depending on the size of the business it could be worth all the cost & trouble. A recent £5.5m t/o client of mine paid a total of about £35K for professional assistance on his MBO.

Good luck.

 

[BubbaWY]

Blimey, you have almost talked me out of it

But appreciate the advice. Sounds a great deal more complicated than I naively thought.

 

[Mr D]

Thanks for the reply. Would you suggest I need my own lawyer, or one to look after both mine and my colleagues interests?

Can share a lawyer on your side of the table.

There have been buyers who have shared a lawyer with the sellers. Not recommended...

Seriously, a business you work for can be problematic to buy because you convince yourself its worth buying. Harder to seperate yourself the buyer from yourself the employee.

Some businesses are worth walking away from rather than buying. But is any one business like that? Need to dig into all the details to decide one way or another.

 

[BubbaWY]

Please let me know their details?

The owner who is selling is a good bloke. The business is run very tightly but everything is paid on time. I appreciate that doesnt mean there wont be anything hidden away or that the owner may not try and drop us into something not nice. But my colleague and I have a good understanding of the business.

I should add that the owner has stepped back from the business over the last couple of years and my colleague already performs a Managing Director role.

 

[Mark T Jones]

The owner who is selling is a good bloke. .

That's nice. But please don't let it undermine your due diligence

From experience, nice, honest people aren't afraid of tough questions.

 

[Clinton]

The owner who is selling is a good bloke. The business is run very tightly but everything is paid on time.

Bad attitude!

There are lots of things wrong in every business. As a buyer, your #1 job is to find what's wrong. I do see this often with people who're convinced they want to go ahead with the deal. They start talking like they're frigging selling the business rather than buying it!

Unless you shed that mindset you won't be able to make a proper list of the things that are wrong. And unless you have a proper list of the things that are wrong, risky, potentially problematic, wonky, rusty, capex heavy, outdated etc etc., you can't properly negotiate the price nor build in the protection, guarantees and indemnities you need in the SPA.

Sounds a great deal more complicated than I naively thought.

Buying even the smallest business is a great deal more complicated than most people appreciate. Sometimes people think that because they've been working in the industry for 20 years or 40 years that they know enough to buy a business. They don't.

Sometimes the business is distressed or whatever and the price is just £1 so people think they're only risking £1. They're not.

But you're not alone. We often get people who've underestimated the complexity and who ask stupid questions (like about where they can download the template for an SPA type contract).

At least you are smart enough to recognise you need professional advice.

 

[BubbaWY]

In fairness I did say "I appreciate that doesnt mean there wont be anything hidden away or that the owner may not try and drop us into something not nice." But before I hand over any of my childrens inheritance (as Theo Paphitis would say) I want to be 100% confident in what I am getting for my money.

I work in construction and I appreciate how volatile an industry it is (its a bloody nightmare to be honest and wish Id chosen a different career path ). I suppose with any MBO there is risk and with construction there is probably a large risk which I need to try mitigate or understand fully.

Ive not really being involved (so far) in the discussions between the owner and my colleague but dont want to and wont walk into it blindly.

 

[Paul Kelly ICHYB]

Is the current company accountant part of the MBO team?

Is the current owner key to the businesses success (knowledge, connections, name etc)?

What does the current owner want? Is it realistic?

The comments already made have been great and, as always, @Clinton identifies what really needs to be done.

 

[The Byre]

A guy I know did just this 12 years ago and by making the profit-share part of the MBO deal payable over ten years, he DOUBLED the amount (in real terms too!) that he received for that section of the business - I even made a little (slightly fictionalised - to protect the innocent) video about this event. (

)

Any real business (as opposed to a job disguised as a micro-business) is composed of many parts, the hoped-for future profit being just one part. Others include knowhow, IP, customer base, building, vehicles, machinery, staff (including old mad MacCrusty in the paint shop and crotchety old Mrs. Millie Tooley in accounts) and the knotty issue of existing contracts and their implications.

This last point about contracts made an old friend of mine rather affluent and killed the company stone-dead. All kinds of Smart-Alec MBAs crawled all over his company, but missed the fact that the products were nearly all licenced in such a way that a change of ownership triggered a five-year get out clause for key engineering designs and patents. That was a seven-figure mistake that the US giant made!

If there is one type of company sale, a management buy-out is the one that succeeds the most (in my limited experience).

Another company I have dealt with many times over the decades built audio equipment and were bought out by the same US giant ages ago. After languishing in their arms for many years, the parent US company decided to sell, so management made an offer that was accepted. 15 years later, management got together with other investors and the management of other audio companies and formed a PE company. TO today is £160m - about ten times what it was under the old US ownership and they have added to their portfolio of brands and companies.

All I can say is good luck, but make sure that you have performed full due diligence on every aspect of the company - and (strange as it might seem at first) perform due diligence on one another!

Nothing is worse than finding out that one partner is unable to pull their financial weight or is not creditworthy - or worse still, wants out after a short period and stops pulling their weight.

 

[BubbaWY]

Is the current company accountant part of the MBO team?

Is the current owner key to the businesses success (knowledge, connections, name etc)?

What does the current owner want? Is it realistic?

The comments already made have been great and, as always, @Clinton identifies what really needs to be done.

No, the Financial Director is not part of it. The current owner has stepped back from the business over the last couple of years. The business has had to evolve during this time as work in the area it specialised in started to dry up which is why me and my colleague were brought in. Turnover is now probably double what it was.

As for what the owner wants for his shares. Personally, I believe it is more than its worth so this is one thing I need to get a full understanding of in due course.

 

[Socio South West]

The owner who is selling is a good bloke. DOESNT MATTER
The business is run very tightly but everything is paid on time. DOESNT MATTER
I appreciate that doesnt mean there wont be anything hidden away or that the owner may not try and drop us into something not nice. But my colleague and I have a good understanding of the business.DOESNT MATTER

I should add that the owner has stepped back from the business over the last couple of years and my colleague already performs a Managing Director role DOESNT MATTER
.

Does the company make healthy profit (not turnover) ?
Has the company been able to re-invest and maintain as well as pay the shareholders a reasonable return?
Is the current market for product healthy and likely to remain so? Is the client base stable and not over dependent on a small number of clients?

You need to get someone without rose tinted spectacles to take the operation apart and bluntly tell you what is right and what is wrong with the business - and thats before you get down to thrashing out the details of a five year deal - which I would be running a mile from as either buyer or seller.

 

[Clinton]

In fairness I did say "I appreciate that doesnt mean there wont be anything hidden away or that the owner may not try and drop us into something not nice."

That's true but you still strike me as enthusiastic for the deal.

I speak with many buyers and sellers in my average week. Over the years I've spoken with thousands of them. One gets a feel for which buyers are keen for the deal to proceed and which buyers are keen to get all the facts and research done before deciding whether they want to do the deal.

You sir come across as, unfortunately, very much the former.

Go back and read what @Socio South West says DOESN'T MATTER, DOESN'T MATTER, DOESN'T MATTER, DOESN'T MATTER.

If you have a good M&A lawyer and accountant, great. If you want a recommendation or two you can drop me a DM (but please mention size of the company and approx geographical location).

 

[James_RawlinsInsurance]

Check if the current owner have Management Liability insurance in place as well. This is useful if after the sale goes through you find discrepancies or unexpected issues, you may need to take action against previous owners.

 

[Chris Ashdown]

What will be your relationship with the new MD, equal shareholder or different, who will have casting vote, what will be the terms of the shareholders agreement,

What do you get out of it apart from your present job, is the investment worth the risk

If the share ratio is different from 50/50 and he has the largest share, whats to stop the new MD taking a much greater pay package and not allow you the same

I think you need your own lawyer for your agreement with the new MD, but ok to join together to purchase the company

 

[SillyBill]

What will be your relationship with the new MD, equal shareholder or different, who will have casting vote, what will be the terms of the shareholders agreement,

What do you get out of it apart from your present job, is the investment worth the risk

If the share ratio is different from 50/50 and he has the largest share, whats to stop the new MD taking a much greater pay package and not allow you the same

I think you need your own lawyer for your agreement with the new MD, but ok to join together to purchase the company

Why would an MD take only 50% of the business? If it isn't the majority or if there isn't a more significant pay packet then what exactly is the motivation for being the main man? As you can probably tell this sort of expectation is a particular gripe of mine, very seldom is something a 50:50 contribution (hence why IMO a lot of business relationships break down when one party gets fed up). Yet so many people blindly walk into that sort of lazy split-it-down-the-middle deal. The most critical thing to sort out right from the off is where the buck ultimately lies and the weighting of shares.

 

[Chris Ashdown]

We all understand the problems that can arise with a 50/50 split, this forum is full of them

On this occasion the two people buying out the company will need each other and have to ut PG's into place to raise the money (fair assumption) so each need each other which may well mean a 50/50 solution is the best for both, neither can most likely raise the money on their own. Maybe one has more money and can buy a larger share , we don't know the full story