Management Buy Outs MBO

Proceedings against delinquent directors are part of the daily routine of our court system.  Those who mismanage their companies can and do go to jail.  The importance of those involved in the management of companies understanding the duties imposed on them has never been greater.

What is a MBO?

A management buy-out (MBO) is a straightforward enough concept.  Yet it disguises the considerable commercial, legal and financial problems which arise. Managers planning to "buy-out" the business from their company will frequently find that the current owners, as "sitting tenants" with existing advisers on call, are in a strong negotiating position. Purchasing managers will therefore be well advised to consult a commercial solicitor, someone independent from the day to day management of a company, at the very outset.   MBO's can vary greatly in scale and type, but basically there are two methods open to existing management to buy their company and the alternatives can have far-reaching commercial and tax implications.  

Buying the Assets 

This first method involves the purchase of all the physical assets of the business together with the goodwill.      

The purchaser will need to ensure, for example, that:
• all those assets do actually belong to the business
• leases have been examined
• any payment to be made for goodwill is reasonable.

The apportionment of the purchase price between goodwill, premises, fixed and other assets of the business will need to be addressed at an early stage, since the tax implications to vendor and purchaser will differ considerably on such apportionment 

Buying the Shares 
Under this method, purchasers are effectively buying every part of the assets and liabilities of the business, whether disclosed to them or not.  It is therefore essential for us as your lawyer to obtain suitable warranties and indemnities to protect the new management.   Warranties, for example, as to the tax position of the company and indemnities for breach of warranty by mis-statement of the assets or liabilities.   Restrictive covenants may also be needed, to prevent the vendors from opening up in competition to the purchasing managers close by and/or too soon after the sale.     

Meanwhile the buy-out team and any investor will often end up owning shares in the same company, but shares held for different reasons.  It is therefore essential to establish what their different rights are, such as voting rights, ability to appoint directors and the sharing of assets on liquidation.     

Any negotiations with outside investors should be conducted only after advice from your lawyer - terms of lending proposed by investors are not usually written in tablets of stone!  

Other Key Issues to Address…..
• Structure of the deal

We will need to consider the structure of the deal, the "indicative" offer, in which tax implications will undoubtedly play a major part.   At this stage it may be possible to negotiate payment for the business by instalments.  

• Shareholders agreement 
The managers will have to consider formalising the relationship that is to exist between them.  We will be able to produce a shareholders' agreement dealing with such matters as appointment of directors, management decisions, dividend policies, and the transfer and valuation of shares. 

• Intellectual property rights 
The success of many businesses is based  on brand names, patents and copyright.      It is important to check that any of these so-called "intellectual property" rights used by the business are owned by it or, if licensed to the business, that the terms are satisfactory and will not be adversely affected by the MBO.  

• Contracts of employment 
A major factor will be to retain the confidence of customers, suppliers and especially the employees of the business.  The new managers may need to provide staff with amended contracts of employment.  They themselves will usually have new service agreements for their own protection and from any investor's point of view to secure the manager's services. 

• Redundancy 
Should some existing staff not be required by the new proprietors of the business, the latter will need to take legal advice on the redundancy aspects of employment law. 

• Pension rights 
Particular care will also need to be taken to safeguard the on-going pension rights of staff.  
 

• Formalities 
As to the formalities, we will prepare the first draft of the "sale and purchase"     agreement, in which negotiations take place until finalised.   At completion of a     company sale, the shares or assets will then be transferred and paid for and new     directors appointed.     

Following completion of the sale, there are a number of legal matters to be attended to.   For example, there is likely to be stamp duty to be paid (which will vary depending on whether the shares of the company or its business have been purchased), changes recorded to the statutory books, documents filed with the Registrar of Companies, perhaps the renewal or assignment of existing agreements with suppliers and the transfer of  licenses.  

How can Warners Help?
In a management buy-out situation, the new managers still have to concentrate on running the day to day business, yet need to get the legalities right, because their very futures are at stake.  It is at such a time that the commercial and legal advice of the specialist solicitors at Warners can make all the difference.    

For further information about how Warners can help you with these and other business issues please contact a member of the company commercial team