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BETTER BUSINESS
Buying with
diligence
In the second part of our focus on MBOs, we look at
the buyer’s perspective and assess the advantages
and pitfalls of buying the business you are working
in, by Adam Bernstein
uying a company via a ferent and so the structure of the
management buyout – acquisition will depend upon the
an MBO – seems like a business being acquired. As Jackson
match made in heaven. outlines, if it comprises a self-con-
A seller wants, for tained business within one company
B whatever reason, to then the acquisition of the company’s
move on while a buyer ensconced in shares would be the most likely
the business seeks to buy something route. However, she says that “if the
that they are familiar with. business is part of a larger business it
But of course, as with anything in may be necessary to acquire just the
business, an MBO is much more assets and liabilities of that particular
than that and requires consideration business; a share acquisition has the
of myriad issues. certainty of acquiring all the business
In the last issue we examined and assets, but the company’s sepa-
MBOs from the seller’s perspective. rate legal personality means that the
Now we look at what buyers need to buyer has no control over what is
know. obtained as all the assets and liabili-
ties – warts and all – will be and the skeletons that may be hiding in cupboards.
Structure matters acquired”.
For Debbie Jackson, a partner in A better solution, reckons Jackson, Due diligence is essential
the corporate group of Walker is “an asset purchase where the buyer Due diligence is a term often used since it is an essential part of the MBO
Morris, an MBO – the acquisition by acquires select assets and assumes process – in spite of what a management team may know of their business.
a company’s management team of responsibility for only certain liabili- And Jackson details its importance. “MBOs,” she says, “need to be
the business they manage – is often ties, leaving behind any unwanted funded, often through a combination of management’s own resources,
about dealing with practicalities. liabilities”. She adds that while an third-party debt and equity funding from private equity investors and debt
That aside, she says that MBOs asset purchase seems ‘cleaner’ for providers. External funders need to gain a complete picture of the business
offer all forms of owner, including buyers, “they need to ensure they get and its critical success factors, strengths and weaknesses – this makes due
owner-managed businesses and large all the business and assets they need diligence essential to underpin the price being paid and to ensure that the
corporates, “a form of exit that leaves to continue the business going for- right contractual protection is obtained.”
the business in the hands of those ward”. To pass due diligence, solid preparation is key in Jackson’s opinion. It
who, by reason of already managing However, asset purchases can be should seek to address any issues in advance to avoid last-minute surprises
the business, are often best equipped more complex if the nature of the and ultimately minimise the risk of value reduction that will affect the sell-
to help the company grow and suc- business means certain licences or er’s pay-out and what funder’s will back.
ceed financially”. For the manage- permits must be transferred, or new But this leads to a particular challenge that Jackson identifies – the
ment team she says “an MBO brings ones obtained, for the business to thorny issue of due diligence and the extent to which a business is prepared
control and reward along with more continue. But on the flipside, Jackson to allow access to the books. She notes that many disposal processes
responsibility and risk associated sees those running the acquisition include ‘vendor-initiated due diligence’ where independent accountants
with becoming owners compared to having first-hand knowledge of the prepare a report that will be relied on by the buyer. However, she warns
being employees”. business so are best placed to under- that “this process also gives the seller and their advisers the chance to flag
Naturally every MBO will be dif- stand what assets the business needs up potential issues and when businesses are not properly prepared for sale,
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