Planning, Funding, and Implementing a Management Buyout

Management buyouts are well-established in Ireland’s M&A landscape. They are an attractive option in many situations as they involve the ownership of the business transferring to a team that is familiar with its operations, personnel, customers, opportunities, and risks.

However, there is no guarantee that the management buyout process or the transfer of ownership will be a success. Success comes with proper planning, careful development of funding arrangements, and the execution of a well-crafted implementation strategy.

In this blog, we’ll touch on the benefits of management buyouts in Ireland and typical scenarios where they are common. We’ll also look at the steps involved in effectively planning a management buyout, the main funding options that are available, and what should be included in your implementation strategy.

 

Management Buyouts in Ireland

As already mentioned, management buyouts can be attractive because of the familiarity aspect. That familiarity often helps ensure a smooth and stable transfer of ownership and can give confidence to existing owners that their legacy will be maintained.

The negotiation of terms and due diligence processes are examples of areas where a transfer of business ownership can be smoother and more stable compared to situations where unfamiliar third parties are involved.

A smooth and stable transfer of ownership also minimises the potential of disruption to operations, and, when planned and implemented efficiently, management buyouts can also create value for all stakeholders.

 

Management Buyout Challenges

While there are benefits, management buyouts can also face challenges. Securing sufficient funding can be difficult, and there isn’t always clear alignment on the value of the business between the management team and the existing owner. In the latter situation, familiarity and existing personal relationships can make the process more difficult rather than easier.

Other challenges include difficulties in balancing the reality of being a buyer of a business and an employee at the same time. The management team may also have limited experience with deals of this nature, while a whole range of additional challenges come into play post-transaction – managing cash flow, leadership adjustment, transition risk, etc.

These challenges can be overcome, especially when you have expert advisors guiding you through the process.

 

Planning a Management Buyout

The main steps involved in planning a management buyout include:

• Establish if a management buyout is a viable option. Are there significant concerns around sourcing funding? Does the management team have the necessary capabilities? Is the owner willing to sell?
• Establish the management buyout team, clarify roles and responsibilities, and agree on shareholdings and decision-making structures.
• Carry out a business review and evaluate the opportunity. Conducting a preliminary valuation of the business is often beneficial at this stage.
• Consider taking out warranty and indemnity insurance. It protects the parties involved (especially the buyers) if contractual promises about the state of the business turn out to be untrue.
• Check if merger clearance or regulatory approval is required and take steps if necessary.
• Develop a business plan.
• Decide on a final valuation for the business.
• Negotiate terms with the existing owner.
• Conduct due diligence.

In all of the above steps, it is important to avoid the challenge of the management buyout process becoming a distraction for either the existing owner or the management team. After all, the business still has to function to ensure it is in a good position for post-transaction success.

 

Funding a Management Buyout

There are a number of funding options typically used for management buyouts in Ireland. In most situations, there isn’t a single source of funding. Instead, a mix of funding is obtained. That mix must be right for the business as well as the transaction.

The main types of funding used in management buyouts include debt finance and private equity, but there are other options too.

 

Debt Finance

Debt finance, such as raising funds through bank loans, is a traditional funding approach that ensures full ownership of the business is retained by the management team.

 

Private Equity

Private equity is where the management team is backed financially by private equity investors. With private equity, the management will typically not obtain full ownership of the business, as the investors will also get a stake.

On the plus side, there is usually no debt burden to manage. This can increase operational flexibility and create a capital structure that is more efficient and suitable for continued business growth.

 

Other Common Funding Sources

• The personal financial resources of the management team.
• Vendor financing, where the existing owner defers part of the payment.
• Mezzanine finance, an option that typically combines both debt and equity components.

Implementing a Management Buyout

The implementation element of a management buyout process is just as important as all the other elements, especially in relation to the performance of the business.

Effective project management is required to ensure nothing is missed and responsibilities are assigned. Some key steps that should be included in your implementation strategy include:

• Negotiate the final agreement and finalise the funding arrangements.
• Obtain any necessary approvals, such as board or regulatory approvals.
• Execute all legal documents and transfer the shares and assets.
• Draw down finance and pay the purchase price.
• Announce the new ownership structure, especially to employees and key stakeholders, including customers and suppliers.
• Implement steps to ensure an effective post-transaction integration.
• Regularly communicate with staff, customers, and suppliers.
• Monitor cash flow and business performance.
• Execute the business plan.

 

Management Buyout Support at Gilroy Gannon

At Gilroy Gannon, we have extensive experience supporting both management teams and existing owners in management buyout processes. Whichever side of the transaction you fall on, we can provide advice and practical support, including helping secure funding for the transaction. Get in touch with us today to arrange a consultation.