Management buyout (MBO) meaning

In a private equity-backed management or leveraged buyout, the principal documents fall into three main groups: Acquisition documents — these set the terms of the purchase between the seller and the buyer (ie newco) Equity documents — these set the terms of the equity investment and govern the relationship between the investor/s and management Finance documents — these cover the provision of the debt facilities and any related facilities (for example, a revolving credit facility for working capital) Acquisition documents Heads of terms (acquisition) The heads of terms, kept to a short form, provide a high-level summary of the parties’ expectations, shared understanding and agreement on the key terms of the intended acquisition. They are signed at the outset of the deal once the parties have aligned on the principal points and before the investor incurs costs on due diligence and the negotiation of the transaction documents...

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This Practice Note forms part of the Lexis+® UK Corporate private equity buyout transaction toolkit. Beyond choosing between a share sale and an asset sale structure, a range of matters should be weighed at the outset of a private equity buyout (MBO), before due diligence begins and the principal transaction documents are negotiated. These matters can influence the core commercial and legal terms, so each side is well advised to address them before settling any headline terms (and before executing heads of terms for both the acquisition and equity elements) and before fixing the transaction timetable. The topics outlined below (and in the Practice Notes referenced in this sub‑phase) may remain relevant throughout the deal, particularly during negotiation of the formal documentation, but they are highlighted early because lawyers for all interested parties ought to consider them and brief their clients as soon as possible. Corporate issues to consider Selected corporate law points are outlined below; applicability will vary with the nature of the deal and the parties...

This Practice Note forms part of the Lexis+® UK Corporate private equity buyout transaction toolkit. Timing A private equity buyout (MBO) typically opens with discussions aimed at settling the key commercial principles in outline. In contrast to a routine share or asset acquisition, three groups are at the table: the investor/private equity fund, the seller, and management, who may, in certain cases, have interests in the seller and/or the target. The fundamental points to confirm to determine if a deal can proceed are the price for the business (commonly via a share sale) and the allocation of management equity after completion. Beyond these, a number of early commercial and legal considerations must be addressed at the outset of any prospective transaction. After the principal commercial terms have been agreed in principle, consideration of the main legal issues is underway and a transaction structure has been settled, the parties are...

Management’s position in a management buyout (MBO) or management buy‑in (MBI) is frequently characterised by tension and potential conflict: on one side they act as owners and participants in the target enterprise, while on the other they remain employees and officers subject to the control and employment of the primary backer (ie the private equity fund). For management, an MBO or MBI is an appealing way to obtain finance to expand an existing business and to capture the rewards of that expansion as part‑owners of the business. Nevertheless, there are meaningful risks for management, both at the initial investment phase and throughout the life of the investment. In an MBO or MBI, management stands alongside the investor as a buyer of the business. In secondary and subsequent MBOs, management additionally appears in the role of seller. For further information, see Practice Note: Buyouts...

Project [ insert name of project ] Preliminaries Heads of Agreement/Equity Term Sheet Manager questionnaires for [ insert names ] Management business plan [ Managers’ tax clearances ] Investment Papers Investment agreement and articles of association [ Manager charging shares: letters from manager and bank ] [ Management rights letter (ERISA funds) ] [ Employee incentive scheme documents ] [ New service agreements for managers: [ insert names ] ] Managers’ disclosures: letter and disclosed documents Board and Shareholder Papers Newco board minutes: incorporation; handover; completion; post-completion Shareholder resolutions: waiver of rights; new or revised articles; share issues; completion; post-completion Miscellaneous [ Foreign legal opinion ]; statutory books for Newco (to completion) [ Insurance: keyman for [ insert names ]; directors’ and officers’ liability; business ] Bankruptcy/director disqualification searches: [ insert names ]; insolvency search: Newco ...