What is a management buyout?

 

Management buyouts may occur when the current owner of the business wishes to get out. The management of the business may be invested in the business and decide that they wish to take it on and pursue its success for their own financial benefit. Management buy outs may occur for a whole business or part of a business. For example, a business may decide to cease or sell part of its operations, of certain facilities or divisions.

One of the major challenges of a management buyout is arranging the finance. This can include going to its bank manager, but in many cases, it will need to turn to a venture capitalist or private equity firm to raise the funds it requires. The finance typically comes from either debt financing from a bank, or equity financing from a venture capitalist or private equity firm. Particularly with the latter options, it is essential that the management group take very careful consideration of the financing agreement.

Financing agreements, especially with venture capitalists, can provide the financier with large amounts of control and financial claim over the profits of the company. It is essential that management groups get comprehensive financial and legal advice from a commercial solicitor before going ahead with any financial deals.

Another major consideration for management groups considering a management buy out is whether they are appropriately skilled, experienced and prepared for the increased functions for which they will assume responsibility. Making the transition from management to ownership can be a big one, depending on the nature of the roles in a particular enterprise.

However, it is essential that management groups undertake a thorough assessment of the business as well as their own ability to assume management. This entails sitting down with a commercial lawyer for a thorough assessment of the financial, legal and commercial aspects of the business. This must occur, with the help of a commercial solicitor, just as it would for the purchase of any existing business or franchise.

Management buyouts often fail because the existing owner does not wish to sell to a management group. Extensive preparation, with the assistance of an experienced commercial solicitor, before approaching management is essential.

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