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Top tips for negotiating a successful MBO sale
If you are planning to sell your business to your management team, agreeing the terms of the deal is just the beginning. It is vital that you manage the management buyout (MBO) process from start to finish as you would any major project. At each stage there will be key decisions and making the right judgements along the way may be the difference between the success and failure of the deal.
Agreeing your MBO sale in principle is only the start. To ensure successful completion, you have to remain focussed on the detail and drive the sale through to the end.
Here we highlight some key tips to reduce the chances of a management buyout deal failing, and to ensure you are in the strongest negotiating position.
The buyers must understand the fundamentals of the business from an early stage, so that they can make an informed decision as to whether to proceed with the purchase and how to fund it. Consequently, it is usually a good idea to disclose key information, such as the overall financial picture, sooner rather than later. This allows the buyers the opportunity to prepare for the transaction properly and it also avoids wasting time if the deal is simply not viable for them from the outset.
Furthermore, by having a deep and thorough understanding of the known strengths and weaknesses of your business, and by adopting a transparent approach from the start, you can utilise this to your advantage in your negotiations. This ‘cards face up’ approach gives an early sense of reassurance to the MBO team which allows you to remain in control of the discussions as the sale progresses.
It is, of course, appropriate that you ask the buyers to sign a confidentiality or non-disclosure agreement prior to making such disclosures. Our team can assist in drafting a suitable agreement, specifically designed for an MBO deal.
Prepare the team
It is in your interests to ensure the MBO team members are capable of seeing the deal through to completion and making a success of their purchase. This is particularly the case if there is any aspect of seller financing or deferred payment in the payment structure.
With this in mind, it is wise to ensure there are the right people in the buying team, and that they have ‘eyes wide open’ going into the transaction. If there are any weak links, such as an individual who lacks the required experience or has the wrong mindset, then it is a good idea to suggest their removal before they potentially jeopardise the deal.
There is often a series of critical issues at the heart of any business transaction that may have the potential to make the deal succeed or fail. Examples of such matters might include taxation; the business valuation; the proposed payment structure; and any debt repayment plan.
It is vital that you address such issues early by involving your solicitors and accountants early on, having honest discussions with the buyers and making informed yet pragmatic decisions with the end goal in sight.
This approach will help prevent any of these issues becoming a dealbreaker or being used as an argument by the MBO team to drive down the price. If you fail to do this, it is all too easy for the buyers to take control of matters and issue an ultimatum in a key area.
Be helpful with due diligence
At the due diligence stage there will typically be a mountain of enquiries and requests for documentation. It is usually best to be helpful and supportive during this stage, taking the view that due diligence is a routine and entirely normal part of any business sale transaction.
This attitude also places you in a strong position during all negotiations, as once again it reassures the buying team that you have nothing to hide and that the business is a worthwhile acquisition.
We are happy to support you throughout this part of the process, and we can advise on any queries that are non-standard or that may require particularly careful consideration.
Avoid late surprises
Nothing has more potential to scupper a deal than a late surprise. You must do all you can to eliminate this risk by being appropriately transparent throughout. Late surprises unnerve buyers and funders and can create fatal doubt over the deal at the worst possible time, just as you are approaching completion.
The better approach is to address known weaknesses or problematic areas in the business head-on and take ownership of how to resolve them, providing practical solutions and workarounds. This is a good negotiation tactic as it helps remove what would otherwise be a potentially powerful bargaining chip that could help the buyers drive the price down.
Warranties and indemnities
It is entirely normal for the buyers to ask for a series of warranties and indemnities in the business sale and purchase agreement.
In this context, warranties are contractual promises or assurances that you as a seller are making about the state of the business and the veracity of the information and documentation that you have disclosed. Typical warranties might extend to, for example, the accounts giving a true and fair picture of the business or your ownership of intellectual property rights being in order.
Indemnities are agreements to meet certain liabilities on behalf of the buyer in the event of them arising at some point in the future. These liabilities may cover such matters as taxation, litigation, or employment claims arising from events occurring before completion. They provide some comfort to the buyer in stepping into the ownership of the business and facing a range of potentially unknown liabilities, some of which will be entirely outside of their control.
The buyers will be advised by their lawyers on the importance of the warranties and indemnities. Since they are a standard request in the majority of business sale and purchase matters, you should approach these requests in a fair and reasonable manner. If you do not, then there is always the risk that the buyers will seek to price this risk into the deal and lower their offer price as a result.
When negotiating warranties and indemnities, it is wise to bear in mind that there is usually a compromise to be found in the wording, provided that both parties are sensible and appreciate both sides of the equation.
Our corporate and commercial team are highly experienced in negotiating these types of warranties and indemnities. We will be happy to advise you on what is reasonable and what is not in your specific circumstances.
How we can help
We can support and guide you throughout your MBO sale and protect your interests at each step of the process with the ultimate aim of securing a timely completion.
Our solicitors will be able to advise you on all the procedural aspects and we can draft and negotiate all the documentation required.
If you are planning to sell your business by way of a management buyout, it is best to engage solicitors at the very start so that you get the most benefit.
For an informal discussion, please contact Ian Barnard, head of our corporate and commercial team on 01653 600070.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.