Financial backers will need to be convinced that the management team has the necessary experience, can demonstrate a successful track record, has a well balanced range of skills and can manage the business independently i.e. without the input of the existing owner.

Management will also need to convince their backers that they have a sound growth strategy and that they are capable of implementing it.

MBOs

Most management teams think an MBO is out of the question because they do not have the full funds to buy the company. In actual fact, the management team are usually only required to invest a relatively small portion of the overall consideration as the rest is funded by institutions such as a bank or private equity house.

The amount of that investment will be dependent on personal circumstances and the extent of any existing shareholding in the business. A broad ‘rule of thumb’ is a sum of money that equates to one year’s salary for each team member.

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MBIs

Without a willing vendor the deal will not happen, so an approach will need to be made early in the process. It will depend on individual circumstances as to whether it is more appropriate for you or your corporate finance adviser to make the approach.

For an MBO, dealings with the vendor need to be handled carefully as the management team will be employed by the business during the MBO process and possibly thereafter should the deal not complete. Sensitivity is paramount. Until vendor approval to progress the MBO opportunity has been obtained, care should be taken to observe your fiduciary duties to the shareholders of the business.

The timing and nature of the approach is a critical area, an aspect on which your corporate finance adviser will guide you.

Completing an MBO/MBI can easily take between 6 to 9 months and sometimes even longer depending on the complexities and the willingness of those involved to take a pragmatic approach.

The overall costs of completing an MBO can be substantial and will typically amount to anywhere between 5% and 10% of the deal value.

A corporate finance adviser will ensure that the costs, where possible, are contingent upon a successful completion of the MBO, thereby protecting the management team from any material personal liability.

The amount of funding raised for the transaction will be sufficient to enable all of the deal costs to be settled by the newly formed ‘MBO’ company, on completion. Occasionally vendors can be persuaded to underwrite an element of the purchaser’s costs to reinforce their commitment to the successful conclusion of the deal.

A BIMBO is a form of buyout that incorporates characteristics of both a management buy out and a management buy in. A BIMBO occurs when existing management – along with outside managers – decides to buyout a company. A BIMBO reduces the risk of the MBI while bringing additional skills to complement the incumbent management team.