Step 1 - Identify what to buy and acquisition vehicle. Often it is obvious what is up for sale, in more complicated buyouts identify which part of the business to acquire and what to leave behind.
Step 2 - Clearance from seller. Before discussing any confidential information of the business, open up dialogue with the seller and obtain their agreement to such disclosure. Otherwise you could end up in breach of your employment with serious repercussions.
Step 3 - Identify the management team. Financial backerswill want to ensure the team has the requisite skills, abilities and drive to be successful, and the expertise to implement their plans and understand the industry and the issues faced by it. Keep the team small, initially, to enable decisions to be reached quickly and effectively.
Step 4 - Appointment of accountants. Discuss with your accountants the MBO opportunity, possible funding options, and what your objectives and ambitions. They will help through the MBO process on accounting, tax and financial matters liaising heavily with your legal advisers. Prepare a business plan with their help to be used to persuade funders to finance the MBO.
Step 5 - Appointment of lawyers. Lawyers and accountants play an essential role in the MBO process, they should be instructed at an early stage to obtain maximum benefit of their combined experience and for them to consider the interaction of the commercial issues with the legal, accounting and tax considerations.
Step 6 - Contact with funders. Consider the maximum borrowings obtainable in the market for the purchase price and working capital. To the extent this can not be provided out of debt, it can be provided by equity investment in the company. The equity investor will take more risk because there is no security for his money. The cost of equity is high, typically over 30% per annum. This is not an interest rate of 30%, but the expected rate of dividends plus return on sale will equate to that level. Funding will involve assessment of the team, due diligence on the business and business plan, referencing on managers and the business, lengthy negotiations, and complex legal documentation
Step 7 - Handling of negotiations with Vendors. You are in a delicate position in negotiating with your employer. It is often better left to financial advisers or even the venture capitalist to handle difficult negotiations.
Step 8 - Exclusivity. It is beneficial for you to agree a period when the seller will not seek other bids nor negotiate with anyone else, giving you a clear run to concentrate on completing the deal.
Step 9 - Negotiation and agreement of the acquisition, debt and equity documents. Here the lawyers (and there are a few of them) come into their own, and from your viewpoint, they seem to talk about irrelevant points for hours on end. This can be frustrating, you just want the deal done. It is, however, crucial that the documents properly protect you and the business, as problems can and do arise post deal, which a well prepared agreement will cover.
Step 10 - Completion. A period of indefinite length with lots of papers to sign, at the end of which the lawyer says it’s all done, congratulations, crack open the champagne ! But after the euphoria, its then over to your hard work to make the business a success.
If you would like a free of charge no obligation meeting on a totally confidential basis to discuss a possible MBO opportunity, please contact Neil Large at Davidson Webber LLP on 01423 727211 or 07920 003796
Davidson Webber LLP has played a major role in numerous high-profile acquisitions and disposals (including MBO and MBI work) valuing over £100 million in the last three years.
