The private equity group provided 100% of the equity in the agreement and offered management a 20% chance of equity with the ability to earn much more equity when the business grows. The private equity group also helped finance the financing of the agreement – a financial sponsor often gives the lender more confidence in a management buyout structure. As a result, the MAI`s capital structure after the closure consisted of debt and equity (owner); the private equity firm owned 80% of the company and the management group the remaining 20% of the company. From a management perspective, management buyouts offer the opportunity to acquire direct stakes in their business and create an entrepreneurial environment. And a management buyback is probably the best way for you and your team to build considerable personal wealth. The final step before the agreement is reached is due diligence. The management team and its financial partners „hit the tires“ and try to learn everything about the company. The most important questions/risks that management has created during the planning phase should guide their work at this stage – management should try to answer and mitigate all questions and risks. In addition, management and its partners should ensure that there is no unknown risk or liability that increases the risk of the transaction (potential loss of large customers, ongoing litigation, asset guarantees, etc.) Buyers often relocate due diligence tasks to different experts. Actions taken at this stage may include an analysis of the quality of the results, an analysis of the size of the market, and a review of legal and regulatory issues/obligations. During this phase, the purchasers and their legal team will simultaneously negotiate the sales contract and other legal documents necessary to conclude the purchase. For their part, to compensate for the drag along provisions held by the investment fund, management shareholders will likely have the right to require any incoming buyer wishing to take control of the acquired company to make an offer to acquire all shares of the company – including the shares of the management team – on the same terms as the shares sold by the investment fund.
This provides additional flexibility to the investment fund; a period during which it can make changes to the business and assess relatively easily the relative performance of each member of the buyback team. When a bank is reluctant to lend, management can generally look for private equity funds to finance most buybacks. Private equity funds can lend capital in exchange for a portion of the company`s shares, although management also lends a loan. Private equity firms can require executives to invest as much as they can afford to combine the self-interest of executives with the success of the company. This is the final step in the buyback process. All relevant documents will be signed and the acquisition of the target entity (or its assets) will actually take place. If you are part of the management team that wants to buy the current owners, you need to think about your approach (or you will be contacted by the owner). A management buyout is complex and should not be treated differently simply because the MBO team was involved in the management of the target company. The MBO team must carefully consider the extent to which due diligence is implemented. Although the MBO team operated the business, they may not be familiar with all aspects of the target. The key to a successful MBO for the management team is to change direction as completely as possible before the takeover.
This means that all critical functions are managed by buyers, including distribution, operations, research and development, customer service and accounting. This reduces the risk of „skeletons in the cabinet“ and shows funders that the management team is able to manage the business successfully, opening up more sources of financing, including more cost-effective debt options.