Page 27 - PWM_OCTOBER 2021 EBook

TECHNOLOGY REPORT

tion. to dismissals or personal liabilities on management, and these are tion”.
As to why an MBO is used, he says that typically sufficient to ease concerns of the owner. And in Taylor’s experience, “a typical
for some it’s about stability as “key man- time frame is two to three months from
agement team members will continue in The process when heads are signed to actual closing”.
office with minimal disruption for cus- Many MBOs are initiated by the owners. But that’s not to mean that He bases this on there being three distinct
tomers and suppliers”. Allied to this, he a management team who thinks an owner is losing interest in the processes: the share purchase agreement
points out that the management team will business or is starting to look at alternative routes for sale cannot and disclosure; a shareholder’s agreement
be very familiar with the business “which raise the matter. and articles of association to be negoti-
will hopefully ease the due diligence and But in addition to a seller or management team kicking the pro- ated between the continuing manage-
disclosure exercise”. Other reasons he cess off, Taylor says “that some of the larger corporate finance firms,” ment team members and the backers (if
cites are MBOs being “a well-trodden and he names two: Cavendish and Livingbridge, “will have their relevant); and the provision of lending
path and private equity firms often have own research teams targeting business that may be ripe candidates and security documents if debt is being
deal teams and sets of documents on the for MBOs”. provided to part or fully fund the exit.
block ready to go as well as a ready availa- For Chaney, how the matter is broached will depend entirely on As to how an MBO will be financed,
bility of MBO funding for the right oppor- the relationship between the owner and the management team. She Chaney says that they are typically
tunity”. suggests that where the owners are part of the management team a financed through one or a combination of
Also, importantly, he adds that there’s tentative discussion may be advisable in the first instance as raising the following: private funding by buyers
“less risk of confidential information the possibility of a sale in any form may be unsettling for the rest of using their own resources, debt finance
being leaked to the market which is still a the team. But she’s also found “that where an MBO has been part of from banks or other financial institutions
material concern if a trade sale is under- a longer-term strategy of succession planning the owner may well or private equity funding.
taken”. have already extricated themselves from the business over time such By extension, where a third party is
No matter the driver, Taylor’s advice to that the conversation is welcomed by management.” involved, she says that the transaction will
sellers, especially those not involved in And, of course, if the company has private equity or venture capi - inevitably take longer, as additional hur-
day-to-day management, is to “consult tal involved, the discussion may arise naturally as it should be obvi- dles need to be jumped before comple-
with a corporate finance firm for special- ous that investors would have had an exit strategy from the outset. tion. She also highlights that “third
ist advice on how to maximise the sale parties will normally appoint their own
price... a trade sale may attract a pre- Handling negotiations lawyers to advise them on the transaction,
mium, with a competitor keen to take Every sale requires negotiation and an MBO is no different. By defi- conduct due diligence, and prepare
control of a competing business”. But that
nition, how it proceeds will be a function of the relationship
Making a planned exit of course requires a private and very per- between the owner and the management team, the sale price this all takes time. In addition, banks have
finance and security documents – and
involved and how the acquisition is to be financed.
sonal moral debate.
structured internal processes to follow,
MBO success isn’t automatic, but
To ease the process Chaney recommends that owners consider
and it is rarely possible to speed these up”.
Chaney thinks it’s highest when an owner
options and to project manage the sale. She comments that “often at
has trust and confidence in the manage- appointing a corporate financial adviser to explore all possible sale On top of that Chaney notes that if there
is existing bank debt in the business or
ment team. But as she says, “it is natural least three sets of legal advisers are involved – one each for the seller, security against its assets, these will need
that during an MBO for sellers to have the purchasing management team and the third-party funder, but to be addressed as part of the transaction
concerns that the buyer is taking steps to there may be more if the interests of a particular side diverge”. because new lenders and investors will
devalue the company. However, it is She warns that there is much at stake and if negotiations don’t go
unlikely to be possible to impose meas- well, the seller risks the morale and commitment of the current want priority over existing security.
ures and restrictions on management to management team. She adds: “This may restrict a sale via an alterna - But there’s another issue: non-man-
avoid taking actions which might devalue tive route in the near term as any resulting changes in personnel agement sellers having to give opera-
the business because it could impede need time to bed down and prove successful.” tional warranty protections to give
their work and is also not an ideal starting Another key risk comes from sellers pulling out against the wishes succour to buyers. In such circum -
point for negotiations.” of the MBO team. It’s one that Taylor offers a concern over. He says stances, Taylor says that “such sellers are
Taylor is more colourful on the issue for that “a disgruntled management team could resign in order to pro - very reliant on management – effectively
he too has “witnessed, on a couple of gress an MBI opportunity, or to set up a NewCo to compete against the other side of the transaction – to
occasions, management teams sabotaging the business, subject to any restrictive covenants in place.” assist and to make sure that a proper dis-
a sale process, which involved competing Where this gets interesting, says Taylor, is “if the management closure process is carried out”. But as he
third-party purchasers, to ensure that team were already holding a small percentage of shares in the busi- points out, a feature of an MBO process
their MBO bid went through.” As he says, ness, they may be subject to restrictive covenants in a shareholders is the multitude of different ‘hats’ that
“this is the exit equivalent of a disgruntled agreement which will usually be more enforceable than restrictive management can be wearing at the same
divorcing spouse leaving the matrimonial covenants in their service agreements.” He explains that that is time: “One moment they can be helping
home in a terrible mess to put off poten- because the starting point for the courts is that any restraint on a the seller with the disclosure exercise
tial buyers”. person’s ability to earn a leaving will be unlawful unless such restric - and the next they can be sitting down
The only solution in Chaney’s mind is tive covenants are reasonable. The same test is not applied if a share- with the MBO backer to pick holes in the
owners relying on the terms of any holder has struck a commercial bargain to regulate a shareholding very same disclosures.”
employment contracts or service agree- relationship. He counsels that because restrictive covenant law can From Chaney’s standpoint, “it’s reason-
ments entered into by the management rapidly change, companies ought to “regularly review the restric- able that where the management team are
where there are requirements to act in the tions imposed on their management team, if nothing else to under- more actively involved in the business
best interests of the business. To this she stand how enforceable they are likely to be.” than the sellers, then the buyers may be
adds, and Taylor agrees, that “where indi- less concerned about extensive warran-
viduals are also directors of the business, In good time ties and indemnities. However, if the sell-
they will also be bound by their statutory An obvious question is how long will an MBO take to conclude? In ers are more actively involved and there
duties to promote the success of the com- response, Chaney says that “the extent of the management team’s are gaps in management’s knowledge
pany for the benefit of the shareholders”. prior involvement in the business along with the financing of the then warranties and indemnities become
Breaches of these obligations could lead acquisition will more than likely dictate the timetable of the transac- more important”.

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