Management Buy Out

Question 1

What is a Management Buy Out?

Answer 1

Management buy out is where a PE fund alongside senior management of an existing company invest in a new company (NewCo) who then buy out the old company/division usually in 95:5 ratio.

Question 2

When do MBOs occur most commonly?

Answer 2

o In a corporate restructuring. A non-core business is spun out
o Controlling Shareholder wants to retire
o Sale of a viable business that has gone into administration and the sell

Question 3

Who are the main parties in a MBO

Answer 3

o Seller
o SPV
o PE Firm/Third party buyer
o Buyout team members

Question 4

What causes complexity in MBO transactions?

Answer 4

o Each party has their own agenda, priorities, interests and expectations
o Many people involved such as Financial advisors and DD advisors, tax advisors and legal documentation

Question 5

How are MBO’s funded?

Answer 5

o Debt

1. Bank normally provides this. Around 50% of value
2. They get as much security of assets and are paid back through interest and principle payments. This is the lowest risk part of the funding.

o Equity

1. Comes from PE firm. Around 40-50%
2. Come alongside management and control the business through a shareholders agreement with rights and vetos over company.
3. Management equity is a small amount and is structured in a way that they can make a good return. Investors like them to have skin the game

Question 6

What are the six MBO myths?

Answer 6

1. You do have to be a millionaire.
   a. Banks and PE firms will provide the bulk of finance
2. MBOs cannot compete with trade buyers
   a. Seller will prefer already known management
   b. Detailed understanding of the business so will be a much quicker transaction
3. Financial investors only back extraordinary management teams
   a. Not so true.
   b. PE firms prefer balanced team. Experience, track record and overall leadership
4. Limited sectors are bankable
   a. Not true. Wide range of investors and nearly all sectors have seen MBOs succeed.
5. Major deals and huge companies involved only
   a. Not true. Most are medium sized. Average in the UK are £25m in the UK. Usually a spin out of a subsidiary or a division
6. MBO’s are more risky
   a. Not necessarily.
   b. Depends how structured. As long as you don’t overpay, over leverage, have stable cash flows to pay down debt over time and a well thought out growth plan.