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Ask the Expert: MBOs, MBIs and BIMBOs

12
Sep

MBOs, MBIs and BIMBOs: what do they mean and what could it mean for you?  Partner and Head of the Corporate and Commercial Team, Martyn Tennant, explains.

Corporate finance is not short on the use of acronyms and the above terms are often floated around in discussion without much explanation to those that are involved in the operation of an owner managed business.

Management buyouts (MBOs), management buy-ins (MBIs) and buy-in management buyouts (BIMBOs) are all forms of exit from a business which result in management taking over ownership of the business in some form.

MBO

This is the most common form of exit of those referred to above when it comes to small to medium sized enterprises. This is a process that results in the acquisition of a business by the existing management team.

MBI

This is similar to an MBO but, in the case of an MBI, the succeeding management team will be external to the existing business. This would be appropriate where the necessary skill set to succeed current owner managers is missing.

BIMBO

Not surprisingly a BIMBO is a mixture of the two routes to exit referenced above and involves participation in the acquisition by a mix of existing managers and external skills to support that team.

What could it mean for you?

Establishing an opportunity to undertake a transaction of this nature is useful as it removes the need for dependence on a third party taking an interest in the business and, in many scenarios, is something that can be planned over many preceding years. Transactions of this nature are also generally viewed as being quicker to process, the business benefits from trusted and experienced staff being retained and there is generally a lower risk that the transaction does not proceed.

If, however, a decision to proceed down one of these routes is taken there are some important points to note and to consider as part of any advanced planning.

In order to progress with any of the above forms of transaction, funding will be critical. Ensuring that the appropriate finance can be put in place often requires careful planning and the appropriate external advice. Funding for such transactions can take numerous forms to include bank debt, private equity, venture capital or angel finance. The approach of third party funders will often be determined by the perceived risk, the experience and knowledge of the succeeding management team and the security available. Development of the management team and exposure to the operation of the business in the lead up to the sale will be of critical importance alongside careful financial planning.

The sellers can also often be required to support the deal by deferring consideration, sometimes beyond that of third party investors. The risk associated with this should be reviewed as part of any prior planning, particularly where it is likely that any security taken will rank behind that of third party investors.

Whilst transactions of this nature are generally viewed to be quicker, it is a common misconception that the business will be purchased with the buying management team undertaking ‘light touch’ due diligence on every occasion. Whilst the information required by the management team in an MBO would certainly be less than that required in connection with a trade sale to an entirely unrelated third party, it is rare that the management team will have knowledge of the full legal, commercial, accounting and taxation affairs of the business. In many instances, their roles may have been limited to specific disciplines such as finance, sales and operations and so working knowledge will be restricted to such areas. The requirements of any funder will also significantly influence the scope of work associated with due diligence. Taking a sensible and realistic approach to what is going to be required in advance and preparing well for this will certainly assist in streamlining the legal process later down the line.

Considering matters from a buyer’s perspective, funders will look to the management team to invest and contribute towards the purchase price and the costs of the acquisition resulting in the need for the use of personal resources. Again, with careful planning with the current owners, there are often ways in which such requirements can be facilitated.

The buyers will also need to give some thought as to how to regulate their relationship through the appropriate corporate governance structures post-completion and, depending on the nature of the finance being raised, this is likely to be heavily influenced by the requirements of third party investors and funders.

MBOs, MBIs and BIMBOs are a useful way of facilitating an exit. Whilst an MBI would be very similar in scope to a trade sale to a third party, MBOs ad BIMBOs do present an opportunity for business owners to ensure succession whilst also looking to preserve a culture and core values associated with the business, which can often be as important as financial considerations. Whilst structures of this nature are not necessarily the means of securing best value, for anyone who takes pride in preserving the approach of a business built up over many years, they can be a very attractive option.

Planning for a transaction of the type discussed above and early discussion with professional advisors, including your lawyer, can assist in identifying any obstacles to be overcome or issues to be addressed as part of such planning. This assists in avoiding delays later down the line.

If you have any queries about this article, or would like to speak to a member of our corporate and commercial team regarding any related issues then please contact Martyn Tennant (mwt@swinburnemaddison.co.uk), or call 0191 3842441.

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