Management Buy-outs (MBOs)

A management buy-out is an exciting opportunity for an entrepreneurial management team to take control of its own destiny, to take their business forward, and to secure a very positive financial outcome. As with any unfamiliar business process, proper solid advice for the buy-out team is crucial throughout this complex and emotional process.

The opportunity for an MBO normally arises in two situations: Either a family-owned business facing a generation change with no family succession, or a group of companies looking to sell a division or subsidiary, often because it is not core to group strategy.

The essence of the 'financial engineering' behind a successful MBO is to borrow almost all the necessary funds for the acquisition from banks and venture capitalists, then to use the company's future profits and cash flows (which should be growing) to repay the debt, thereby enabling the MBO team ultimately to sell the business debt free on a multiple of the higher level of profits. As venture capitalists take more risk than banks, they look for a share of the ownership (ordinary shares), which dilutes the MBO team's ownership.

Cole Associates' role is to guide the MBO team through all aspects of the process, recognising their dual role as managers/employees of the vendor up to completion, and, at the same time, prospective purchasers of the business. We aim to establish and maintain a smooth relationship between the vendor and the MBO team, by taking the lead, on behalf of the team, in managing the entire transaction. Given the large number of people involved in an MBO, our focus on project management includes coordinating the critical path of the transaction, to facilitate a timely completion.

Specifically, Cole Associates' role comprises:

Valuation and feasibility review:

• To determine upfront whether the vendor's price expectations are sensible and if there is a realistic prospect for funding the MBO.

Raising finance:

• Guiding the MBO team in the preparation of their Business Plan and financial projections, setting out their strategy for the business, and determining the full funding requirement.
• Advice on the most appropriate funding structure (i.e. the mix of debt, venture capital, finance leases, grants etc).
• Introducing the funding opportunity to a selection of appropriate funders. We have a comprehensive knowledge of the finance-raising marketplace.
• Assisting the MBO team in presenting their proposals to the funders.
• Negotiating with the funders, to obtain the funds on the most advantageous terms possible for the MBO team.
• Liaising with the preferred funders throughout the remaining stages of the investment/lending process, including due diligence and legal agreements, through to credit approval.

Negotiating with the vendor:

• Advice on pricing and tactics.
• Preparing indicative offer letters.
• Negotiating on behalf of the MBO team to acquire the business on the best possible terms.
• Liaising with the lawyers to agree the legal documentation.