What is a management buyout?

 

A management buy-out occurs when the owner of a business decides to leave and sells all or part of the company to the management team.

Very often, senior managers are already shareholders, but they may not have full ownership. Taking over the business from its original owner gives them much more control over its direction and allowing them to profit directly from their decisions.

For the legal background to this subject, visit our company law faq pages.

Raising finance

One of the major challenges of a management buyout is arranging the finance. A large business may be worth many millions of pounds and even senior executives rarely have direct access to this much capital.

The finance typically comes from either debt financing from a bank or equity financing from a venture capitalist or private equity firm. Particularly with the latter options, it is essential that the management group take very careful consideration of the financing agreement. Here’s some information on venture capital.

Financing agreements, especially with venture capitalists, can provide the financier with large amounts of control and financial claim over the profits of the company. It is essential that management groups get comprehensive financial and legal advice from a commercial solicitor before going ahead with any financial deals.

You can learn more about how these agreements work on our commercial loans page.

Competencies and commercial viability

Management buyouts can fail because the existing owner does not wish to sell to a management team, either because they believe it is a bad deal for them or they are concerned the business will not be properly looked after. Extensive preparation, with the assistance of an experienced commercial solicitor will help alleviate this risk.

It is essential that management groups undertake a thorough assessment of the business as well as their own ability to assume management. This entails sitting down with a commercial lawyer for a thorough assessment of the financial, legal and commercial aspects of the business.

This must occur, with the help of a commercial solicitor, just as it would for the purchase of any existing business or franchise.

Another major consideration for management teams considering a buy-out is whether they are appropriately skilled, experienced and prepared for the increased functions for which they will assume responsibility. Making the transition from management to ownership can be a big one, depending on the nature of the roles in a particular enterprise.

A good company lawyer will be able to advise on what responsibilities may be delegated to assuage this issue.

Visit our commercial law pages for more information on related subjects, or call us on the number below to arrange a referral to a specialist solicitor.

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