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Management buy-outs

Dec 14, 2012
Staff have no 'right of first refusal' when it comes to buying the company they work for.

By Caroline Graham of Keystone Law

In the current economic environment, many business owners are considering whether or not the time is ripe to dispose of all or part of their companies, and many management teams in recent years have found themselves running a company which is ‘up for sale’.

In many cases, the incumbent management are interested in buying the business themselves. If you believe in your business and its market, the thought of owning the company can be an exciting prospect.

Some may be surprised to learn that employees have no automatic ‘right of first refusal’ to buy the company that employs them. If they want to be successful, any offer the management make will have to be competitive if there are other potential buyers interested. Having said that, management often know their business better than anyone (even the current owners) and can see how it can be re-shaped to take advantage of changing opportunities in the market. If they can secure the money needed to make the purchase, they may be able to put together the most persuasive bid.

Finance is obviously key. Traditionally, most management buy-outs are financed using a mixture of secured bank debt, cash provided by the management team themselves, and private equity money. In today’s market, finding bank debt is often challenging, but where there is a private equity investor involved they will usually take the lead on this.

Private equity investment is a well-trodden path but it pays to involve the right expert advisers at an early stage. Many accountancy firms employ specialist corporate finance advisers who will be able to assist management in structuring the best financial deal, and lawyers who specialise in private equity and investment agreements are frequently found in the larger commercial law firms.

Not all buy-outs are instigated and led by management teams. Frequently, the seller of a business will offer it to the market through an auction process, and private equity firms may enter the fray at this stage. These firms are not usually experts in a particular sector, but select companies based on growth potential and, crucially, on the quality of their incumbent management team, often supplementing that team with their own chosen managers. In this sort of transaction, known as a ‘buy in management buy out’ or ‘BIMBO’, managers often find themselves being asked to invest in shares in the company, sometimes with arrangements enabling them to increase their shareholding if they achieve particular success.

It is worth being aware that, whether backing a “classic” management buy-out or leading the process themselves, private equity investors aim to invest for only a fairly short period of time of between 3 and 5 years, and that the focus throughout that period is usually on growing the company for onward sale. If management see themselves running the company for a longer period, they may have to consider other funding options, or brace themselves for doing it all again a few years later.

Caroline Graham
is a corporate solicitor with Keystone Law, specialising in mergers and acquisitions and private equity.

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