1. Assessing your chances and the ‘sounding out’ process
At an early stage the MBO team should be determined and soundings taken by the team leader as to whether the team has an appetite to get involved.
Alongside this a high-level approach to the vendor should be made. This needs to be handled sensitively and the response judged as to whether there is in principle a possible deal to be done.
At this stage, if there is a willing vendor, outline discussions may take place on value. At this point, if not earlier it is imperative to take independent advice from a corporate finance advisor.
2. Your advisor
You should appoint a corporate finance advisor as soon as possible to assist you through the deal. Their fees will often be on a part contingent basis, and the vendor/company may be prepared to underwrite some of the costs. Costs associated with an MBO transaction will however be built into the overall funding required.
Ensure your advisor has the right credentials. Try to find out what deal experience they have in your sector and whether they are experienced in MBO transactions.
Your advisor will talk you through every stage of the MBO process and assess whether your plans so far are viable. They will provide an independent, secondary opinion and assist in maximising your chances. They will ensure that what you present to the vendor and funders gives you the best possible chance of success. Your adviser will also ensure the deal is structured in a manner that is commercially viable and ideally advantageous to you in terms of taxation.
Moreover, an advisor will be able to approach the vendor on you behalf, know the right time to approach them and negotiate with them to obtain the best deal for you and one that the vendor is happy with.
An experienced advisor will have many MBO deals under their belt and this experience is critical to managing the emotional roller-coaster ride to completing a transaction. The advisor will:
- Provide an independent view on valuation
- Add credibility to funding proposals
- Prepare you for meetings with funders
- Negotiate with vendors and finance providers on your behalf
- Assess the reasonableness of all commercial terms
- Project manage the entire process.
3. Agree terms with the Vendor
Once you know your MBO team are committed and the vendor has agreed to consider an MBO, it is now time to approach the vendor seriously and negotiate the terms of the deal.
Let your advisor lead the negotiations. You should reiterate your goals and aspirations to your advisor prior to any negotiations so they are clear on what you definitely want to achieve and areas you wouldn’t mind giving a little on. Your advisor will consult you at various stages throughout the negotiations but if they have a clear picture of your goals from the outset they will be able to work more effectively.
Approach negotiations with the aim of reaching a mutually beneficial solution for both parties. Those who go in with a bullish attitude will more than likely just cause major stumbling blocks along the way and breakdown the existing relationship. Always keep your own goals in mind, try not to be fastidious on elements that don’t concern you too much as if you give a little in certain areas of importance to the vendor negotiations will remain harmonious which is critical.
An imperative tool in negotiations is remaining composed, emotional outbursts will distract both sides from the task in hand. It is also important to be strong during negotiations and if the other party are not playing fair then have the courage to walk away from or at least reconsider the deal.
Always bear in mind that should negotiations fall through you may need to revert back to your existing management roles which is why some degree of harmony in negotiations is important.
4. The business plan
Despite knowing the business and its current owners very well you will still be required to prepare a business plan in a professional manner. The business plan will be your selling tool; it will portray your future plans for the business, show your understanding of the current business and its markets and how you plan on making any necessary changes. You should be selling your vision to potential funders in order to secure support for the deal.
As soon as you obtain clearance from the vendors to pursue the MBO you should agree heads of terms and an exclusivity period to arrange finance and then commence work on the business plan. Your advisor will assist in pulling the document together and ensure it covers all necessary areas, but you will need to write the majority of the content and provide detailed financials for your advisers to generate forecast models to substantiate your plans. It takes a lot of effort to create a good business plan but it will prove to be essential in the early stages of the deal, as well as providing you with some structure going forward. It also importantly enables your advisor to critique your plans before being put in front of the funders.
5. Locate your funding
Once you have a business plan you will be able to engage in dialogue with funding providers. Your advisor will be able to give you advice on an appropriate funding structure for the MBO. Your first move will typically be to speak to your current bankers to see if they will be interested in supporting you. This will be the simplest option as the bank will already know your history and your business.
It will also be worthwhile approaching some other funders in case they can provide you with better terms. Your adviser will be able to assist you in determining active and appropriate funders in the local market.
6. Perform rigorous due diligence
This phase of proceedings will allow you to delve into the inner workings of the business. Whatever your involvement in the business prior to the MBO you will have inevitably been excluded from some aspects of the business. This is now your chance to check everything is in working order and that you are paying for what is actually there.
Due diligence for an MBO party may not be as meticulous as for an external buyer as you already know the business. But remember it is the funders who are taking the lions share of the risk and they will need to be satisfied with their investment. For this reason external financial and legal due diligence will be commissioned by them.
The day of completion will essentially involve all parties signing a raft of pre-agreed documentation and the process is generally controlled by the legal advisers acting for your team and the vendors. Issues can arise late in the day but again your various advisers will help you manage these.
You should keep in touch with your banking team in the run up to the completion to ensure all funds (personal/bank/VC) are accessible and can be transferred when required.