MBOs and MBIs

Our corporate team has extensive experience of mid-market management buyouts, investment buyouts, management buyins and secondary buyouts, acting for both the management team and for the institutions.

Frequently asked questions

Everybody loves an acronym…

I am thinking of buying the business I run. When should I tell my colleagues?

Where can I find the funds to back my bid?

I’ve been asked to participate in a buy-in. What questions should I be asking?

Will this be different from the other acquisitions I’ve handled?

How much control will my backers expect?

If I leave my new company, will I lose my investment?

Everybody loves an acronym…

Perhaps the three most common in the field of buy-outs are:

MBO – Management Buy-Out: the purchase of a business by its existing management.

MBI – Management Buy-In: an outside team of managers buy a business with a view to replacing its existing management and running it themselves.

BIMBO – either a sexist term which has no place on a respectable website or a Buy-In Management Buy-Out: the purchase of a business by a combination of institutional investors (the buy-in element) and existing management (the buy-out).

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I am thinking of buying the business I run. When should I tell my colleagues?

As an employee and/or director of the business, you will owe certain duties to the company and its shareholders. Active steps in pursuing a buy-out can put you in breach of those duties. Your first port of call is the board of the company, or, if you are a director, those independent directors who will not be involved in the buy-out. You will need to get their consent before you disclose any confidential information to third parties (e.g. potential funders) and if the buy-out is going to take time away from your duties to the company. See also our briefing note on this topic. It is important to get legal advice on this area as soon as possible since getting it wrong can mean you lose your job!

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Where can I find the funds to back my bid?

There are many different sources of funding, depending on the size and nature of the business. Smaller buy-outs may be funded from management’s own resources, perhaps backed by investments by business angels or bank funding. Bank lending is typically easier to secure when the business has particular assets (property, stock, debtors) that can be pledged as security. The larger buy-outs which hit the headlines tend to be backed by big institutional investors such as private equity funds and management’s financial contribution may be a much smaller percentage of the total, although important to demonstrate their commitment.

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I’ve been asked to participate in a buy-in. What questions should I be asking?

You will want to know that this is a viable proposition, especially if you are jumping from a secure position. The buy-in team as a whole will conduct due diligence on the target. But you should also consider the funder and the other prospective members of the management team. What is their track record? Even if they are clearly competent people will you get on with them? You’re probably going to have to work with them for the next 5 years or more. And, of course, the financial terms on which you are being asked to invest will be rather important!

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Will this be different from the other acquisitions I’ve handled?

It is important to remember, that as well as the acquisition, you are also involved in an investment transaction in terms of funding the buy-out. This means more work for all concerned. Also, on a buy-out, you will find that you have to place much greater reliance on your knowledge of the business than you will be used to on other acquisitions. Sellers generally give limited warranties on the basis that management know as much if not more about the business than them (although this is less the case in MBIs and BIMBOs). The counterpart of that is that often management will be expected to give warranties to the investors - even though they are notionally on the same side, the investors want to make sure management have given them the whole story.

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How much control will my backers expect?

This depends on who is funding the acquisition. Debt funders tend to impose quite strict financial performance targets (or ‘covenants’) that have to be maintained but are otherwise hands off. Business angel and private equity investors will still leave day to day running of the business to management but will usually want a seat on the board. They will also seek control by having specific rights to veto certain significant actions by the company.

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If I leave my new company, will I lose my investment?

Usually, yes. On an MBO or MBI, management’s equity stake will generally be conditional upon them continuing to be involved in the business. This is intended to act as a performance incentive and to ensure there are no disgruntled ex-employees holding shares in the company. The articles of association of the company will require management to sell their shares when they leave, often at a price below their market value or even what was paid for them. There is often some negotiation on this issue and the position may vary depending on the reason for the departure. See also our briefing note on this topic.

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