MBO’s are one of those things that are easy to talk about but inherently more difficult to translate into coherent plans, actions and outcomes. Expectations, complexity and emotions often combine to thwart the necessary planning and execution stages. Navigating these barriers can be difficult because MBO’s/MBI’s invariably involve a multitude of moving parts and inter-dependent variables.

Successful outcomes require early reconciliation of value/price and deal structure as well as coordination of multiple capital (debt) components.

Valuation Expectations

Reconciliation and agreement on valuation can be a stumbling block; for example where the seller’s expectations are based on emotional attachment. The starting point for valuation expectations are almost always based on perspective. Perspective here is in important; all things equal, the business/company should be worth more in the eyes of current shareholders than those of a disconnected, dispassionate investor.

Use of Leverage

Typically, private equity is tapped to provide the majority of financing. To the extent the balance sheet / P&L supports it, bank term and working capital financing could also be considered. In planning ahead to a successful exit strategy, debt and working capital financing provided by the bank will be the cheapest form of finance. The equity and secondary (“mezzanine”) debt provided by the private equity firm(s) will be more expensive to the management team, particularly in the event of additional drawdowns or extension of facilities beyond those originally contemplated.

Chronology of Steps

Each MBO/MBI is obviously different, but typically it takes around six months to complete a transaction. All transactions will include some or all of the following steps:

  • Assemble Management Team
  • Engage a Financial Advisor (JPL)
  • Review the opportunity to confirm its suitability for an MBO/MBI
  • Evaluate the potential price and deal structure
  • Approach the Seller and secure an exclusive position
  • Develop an Information Memorandum and or business plan
  • Identify appropriate funding sources
    • Including internal (Management investments)
    • Consider external debt (term and working cap) as well as equity
  • Obtain tax advice and legal advice
  • Obtain and negotiate offers of funding
  • Draft and negotiate the Letter of Intent
  • Complete due diligence
  • Negotiate Purchase and Sale Agreement
  • Negotiate closing documents and other agreements

JPL’s Role

For most management teams, this is unfamiliar subject matter (contact base) that must be mastered, micro-managed and executed at the same time day-to-day demands of the business are being juggled. That’s a serious distraction.

Contemplation of embarking on this journey, and it’s a journey, without a dedicated, fully immersed function would be ill-advised.

Since management will need to work very closely within the process on a daily basis, it is vital to appoint an advisor who is intimately familiar with the space and all of its quirks and nuances – through sales and marketing, IT and infrastructure, compliance and regulatory; one who will leverage specific domain expertise, financial engineering/deal structuring techniques, global contact base and track record of actually getting deals closed.