Management Buy-Outs: A Financial Solution To Corporate Vicissitudes

Management buy-outs are one segment of business that could make a great movie. The reason being that in many occasions they consist of the drama of tough and tense negotiations as well as the stress of trying to raise a great deal of money. As if this was not enough, there is a nerve-wracking race to meet the ostensibly unattainable deadline. If one adds to all the above the philanthropic aspect that management buy-outs have in honoring loyal staff and preventing unemployment then it has all it needs to comprise a great movie. The term management buy-out  refers to the process whereby managers and/or executives of a company purchase the controlling interest of the existing shareholders. To facilitate this, a new company has to be formed and the new company takes over the target.  Broadly, the company management will not have the necessary capital on hand to make the transaction which means that its first step will be to seek for a bank that will be willing to help out by providing a loan.   However, management buy-outs are (generally) risky to finance through a loan so there are two other forms that this funding can take.   Namely, vendor financing and financing via Private Equity.  The latter is imperative for the purposes of this paper as it refers to finance provided by either institutions or individuals while in return they will receive shares in the company and in this way influence its strategy.

This article will demonstrate that MBOs is not at all an easy process and thus some issues should be thought of very seriously before it is carried on. In doing so, we will discuss the key legal issues and their connection with core commercial considerations paying particular attention to corporate control and financial structure. Hence this paper is divided into five parts.

Part one will discuss briefly the origins of management buyouts, the purpose as well as the pros and cons.  This will provide a good starting point and will smoothly lead to part two which discusses the ingredients of a management buyout. The spotlight will be on finance and particularly on private equity and the issues that are linked to it such as information asymmetry, the problem of principal-agent, corporate governance and due diligence will be examined as well.

The third part will discuss some aspects of the process of a management buy-out and will show the critical factor that usually determines the timescale and increases the costs.

The fourth part will discuss some ‘eye catching’ issues such as share rights, share transfers, and issues that relate to corporate control such as soft power paying particular attention to emerging markets such as India, Taiwan and so on.

Part five will discuss what does success mean in a management buy-out and we will draw our conclusion.

Author: George P. Kyprianides LLB, LLM with Distinction, University of Reading
Tel:+35724656406   Email: erteam@cytanet.com.cy