Transfer the company to an employee (MBO)

If you are a business executive and want to own your own business, or if you own a business and are considering its long-term future after retirement, why not contact us to discuss your options?

If you own a business, a realistic option that you should always consider is handing over to employees as they are often best placed to do this.

The advantage for you is that a management buy-out (MBO) is generally easier to achieve than a trade sale to another company, as there is a pre-determined buyer who already knows the business and less onerous guarantees/indemnities are usually required, thus avoiding risk.

It is also an opportunity to properly reward your management team with the opportunity to retain your legacy and enhance it in the future. For the management team, it can be a unique opportunity to buy out the business and create some personal wealth.

Our specialist MBO team will be able to help you with this transaction:

• Acting as an intermediary between the two parties during the negotiations
• Providing independent advice on the valuation and commercial terms of the transaction
• Preparing you for meetings with banks and investors
• Helping you prepare the necessary business plan and financial forecasts
• Advising you on how to raise funds on the right terms and on the financial structure, and presenting you with debt and equity
• financing solutions
• Managing the entire process through to completion

ADVANTAGES OF MBO

There are several advantages to these takeover modes for all concerned. Most obviously, they allow for a smooth transition. Because the new owners are already familiar with the SME and its operations, there is less risk, other employees are less likely to be concerned, and customers and business partners are reassured. In addition, the internal process and transfer of authority remains confidential and is often completed quickly. Once the business owner agrees to transfer or sell the business to staff members, a series of common steps associated with the transfer of authority are usually adopted.

The typical process is as follows:

• The valuation of the company sets the agreed price.
• The employees estimate the portion of the shares they can acquire immediately before drafting the shareholders’ agreement.
• Financial institutions are approached.
• A transition plan is developed that includes tax and succession planning.
• Employees acquire the seller’s share through financial support.
• Decision-making and ownership powers are transferred to the successors. This can take place over a period of months or even
• years.
• The employees repay the financial institution. Repayment is made according to a schedule and at a pace that will not unduly constrain the growth of the business.

Buyers should ensure that the project is profitable or at least has the potential to be profitable. Remember that a buyout requires considerable funds, which will affect the cash flow of the business. To offset the cash outflow required for repayment, buyers will need to adopt a strategy to increase cash flow, such as reducing expenses, improving productivity or increasing revenues.
A comprehensive financial analysis should reveal cash flow, sales volume, debt capacity and growth potential. It should also provide important information about the fair market value of the business and the management’s discretion.

HOW TO PREPARE FOR AN EMPLOYEE BUY-OUT?

The buyer(s) will need to develop a sound business plan in order to prepare for the acquisition. Forecasts should be credible and realistic. Personal and business contacts and references can also help a successor gain the confidence of bankers. In the case of a small-scale buy-out, one financial institution is usually sufficient to finance the project. In larger transactions, several institutions may be involved in the financing.

In a leveraged buyout, the assets of the business are valued to determine the equity available for financing. The lender will use the assets as collateral. The financial institution will set the interest rates according to the risks involved in the transaction.

The lender may ask the seller to finance part of the sale to demonstrate its commitment to the project and its confidence in the management team. Be sure to shop around for the best terms from financial institutions.

HOW TO FINANCE AN EMPLOYEE TAKEOVER?

Here are some basic types of financing that can be combined to make your transition a success.

• Personal funds help to gain the confidence of a financial institution, increase the equity for the transaction and share the risk. Buyers are often required to invest a significant amount of their own equity, including refinancing personal assets, to prove their commitment.
• Bank loans or credit notes are often used to buy the shares you hold in the business. This type of financing is attractive because of its simplicity: assets are used as collateral and interest rates are lower.
  Vendor or owner financing allows you to spread the payments over a number of years. This type of financing ties you directly and may include credit notes, loans or preferred shares. This method reduces the cash outflow at the time of the transaction and eases the transition.
• Similarly, the purchase of shares payable in instalments allows the seller to retain a level of control until they have been fully repaid.
• The sale of shares to other employees can be used in conjunction with an employee buyout or a leveraged buyout to finance the remaining portion. This type of financing allows other employees to acquire stock options in the company. This form of financing can motivate existing employees, while the management team retains control of the business.
  Subordinate financing can complement the management team’s equity investment by bringing together some elements of both debt and equity financing, without diluting the equity stake in the business. If a profitable business maximises the financing of its assets and the management team’s own funds are insufficient, the institution providing the subordinate finance may agree to take on more risk to participate in the project. Repayment terms are set at the time of the transaction.

A management buy-out (MBI) is a similar operation, but it involves introducing new management into the business to carry out the transaction.

If you think your management team needs to be strengthened to facilitate a sale, don’t give up.

We have databases of contacts looking for such an opportunity with a proven track record to help you.

Finally, we have a 100% success rate in financing buyouts.

But just as importantly, we fully understand the dynamics of selling to your management team or representing management in what can be a unique opportunity to own a business.

It will be a new experience for many and you don’t need to have huge personal financial resources to do it.

In most cases, the management team takes full control of the business and relies on their expertise to make it successful. Both types of business takeovers, which can be large, are usually financed by a combination of personal funds, investor funds and owner funds.