MBO and MBI
A management buy-out occurs when an existing management team acquires a business (possibly supported by acquisition finance from a lender and/or equity finance from a venture capitalist). Two new agreements are now available. The first (Asset Sale Agreement - Management Buy-Out) is for use where the existing management team acquires the assets and undertaking (the business) of a company. The debtors and creditors are transferred and the company is also transferring property as part of the transaction. The second (Share Sale Agreement - Management Buy Out) is for use where a management team buys a company which is a subsidiary of another. The company being bought has subsidiaries (i.e. it is part of a group) and is the owner of real property (whether freehold or leasehold).
Both documents have substantially reduced warranties and some optional conditions precedent have been added to each. The warranties have been reduced because, in a management buy-out, the management team will have much greater knowledge of the operation of the company than the Seller(s). However, certain matters may be dealt with at group level. For this reason, the warranties for Insurance, Pensions and Tax are in square brackets and are optional. If any or all of these matters are dealt with at group level then these warranties can be included. By contrast, if any or all of these matters are dealt with at operating company level, then each warranty can be deleted as appropriate. The conditions precedent are included because, if a director of the company being sold or of its holding company is involved in the buy-out, then it may be necessary for the prior approval of the shareholders to be obtained (section 190 of the Companies Act 2006 – substantial property transactions).
A management buy-in occurs when a new management team acquires a business or company (which may be supported by acquisition finance from a lender and/or equity finance from a venture capitalist). Since the new team has no pre-existing knowledge of the business/company, it will want full warranties. Contrast this situation with a management buy-out, where the acquiring management team know the business/company very well.
Two agreements are now available. The first (Business Sale - Management Buy-In) is for use where a new management team acquires the assets and undertaking (the business) of a company. The debtors and creditors are transferred and the company is also transferring property as part of the transaction. The agreement is guaranteed. The second (Share Sale Agreement - Management Buy In) is for use where a new management team buys a company which is a subsidiary of another. The company being bought has subsidiaries (i.e. it is part of a group) and is the owner of real property (whether freehold or leasehold).
Consideration (Purchase Price) Schedules for Asset/Business Sale and Share Sale Agreements
These schedules are designed as replacements for the consideration schedule found in the Asset/Business Sale Agreements and the Share Sale Agreements. The existing Agreements only cater for a scenario where the purchase price for the Business/Shares is being paid in cash at Completion. Many transactions will not be paid for in cash and the schedules include several alternative scenarios.
The Schedule - Purchase Price Paid in Shares allows for the purchase price to be paid by allotting shares in the Buyer to the Seller(s). The schedule is available for asset/business and share sales. An independent accountant is appointed to value the Buyer’s shares, following which the Seller(s) are allotted shares which, in total are equal in value to the purchase price. There is also an option for the purchase price to be paid wholly or partly in cash.
The Schedule - Purchase Price based on Completion Accounts with ESCROW allows the business/company being sold to be accurately valued at Completion. The schedule is available for asset/business and share sales. Two versions are available for asset sales depending on whether the creditors and debtors are transferred. The Buyer will pay an initial sum for the assets/business or shares at Completion and a specified sum will be put in an escrow account. An accountant is appointed to make an accurate value of the business/company and if the accountant’s valuation is more than the initial sum paid, then the Seller(s) will receive the shortfall from the escrow account, but if the opposite is the case, then the Buyer will have the escrow funds returned.
The Schedule - Initial and Deferred Purchase Price in cash with Earn Out is more complicated and allows for the purchase price to be comprised of an initial cash sum payable at Completion and a further cash sum based on a multiple of the profits of the business during an earn-out period. The schedule is available for asset/business and share sales and is also available in a variant where the initial/deferred consideration is paid by allotting shares in the Buyer to the Seller(s). The schedule will typically be used in an Institutional Buy-Out (“IBO”) where a venture capitalist or large institution makes the acquisition but retains the management to run the business on a day to day basis. The earn-out gives the management team an incentive to perform because they will benefit if the business/company is profitable. The deferred consideration entitlement is calculated by the Buyer’s Accountants by reference to the business/company’s profits. If any of the Seller(s) cease to be employed by the business before the end of the earn-out period due to ill health, death or termination of their service agreement (except for summary dismissal) then they will be entitled to the full deferred consideration. If not, then the deferred consideration will be pro-rated. This is fair because the Seller(s) will be allowed to benefit from the earn-out if they stop working for the business/company through no fault of their own but not when they are at fault. The Deferred Consideration is subject to a cap, which must be specified.
The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.