These considerations and the rest of the information included are a starting point. Each MBO is unique, and the specifics will depend on your business, the management team, and the industry you are in. Consulting with an experienced MBO lawyer, a financial advisor, and potentially a business broker would be prudent steps to ensure a smooth and beneficial sale process for both parties.

Who to sell to?

  • A Competitor
  • The Market
  • Family
  • Management buy-out (MBO)
     A MBO is where a business owner sells the business to a manager, or group of managers, who are currently employed in the business.

Why an MBO

  • Opportunity to pass the business on to a new generation of individuals who helped you build it
  • Provides flexibility on when you exit
  • The purchasers are not strangers to the business
  • Less fear of unknown issues so less fear of purchasing shares vs. assets
  • Less fear of unknown issues (tax, lawsuit, environmental, or statutory lien rights) so lesser emphasis on due diligence
  • Less concern with privacy rights of employees

Prerequisites

  • A willing and capable manager or management team
  • “Capable” includes a person or people that will be able to maintain, and hopefully grow, your business.
  • “Capable” also means a person or people that accept and are able to raise money and give it to you.
  • The value of your business since it will not be exposed to the market
  • CBV?
  • Balance Sheet Method vs. Income Statement Method
  • Let your manager or managers know early in the process that you will not sell the business for less than its worth, but will be flexible with the terms

Prepare the company

  • Early stages
  • Does your company minute book need to be cleaned up? It will be examined by the purchaser's lawyer
  • If there are other shareholders consider obtaining/updating a shareholder agreement at this stage
  • Does your company include assets that you do not want/will not sell eg. Land – consider removing
  • Unusual to change capital structure at this stage

Negotiate the Deal

  • Role of the Lawyer in negotiating
  • LOI?
  • Agreement
  • Post Acquisition Operational Financing
  • Working Capital left in the company
  • Operating Line of Credit

How does the Manager or Management Group Pay you?

  • An MBO is usually financed with a combination of the following:
  • Cash
  • Bank or Senior Lender financing
  • Mezzanine financing
  • Vendor financing
  • Take back debt
  • Earn outs
  • A consideration is the interaction between security demanded by the Bank for its financing, and security for the Vendor financing portion
  • Mortgage, PPR, share escrows, guarantees and security from the shareholders
  • A consideration is how much money the manager can come up with. Consideration can be given to immediate purchases of a lesser amount of shares, and staged buy-outs

Control Issues

  • In circumstances where there is a staged buy in, consideration must be given to maintaining control
  • Voting/non voting shares
  • Shareholders Agreement

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.