A Management buy-in (MBI) is a transaction which involves an external management team (the ‘Management Team ’) buying the business from the existing owner (the ‘Seller’).
Typically, the Management Team seeks to acquire the business because it feels that the business is underperforming and, with a change in management and/or business strategy, it can improve the turnover, profit and value of the business. After the completion of the MBI, the external Management Team may replace the whole or a significant part of the existing management Generally, the external management teams in an MBI is led by experienced managers.
The target of an MBI is usually a private limited company (the ‘Target’).
The Management Team will usually seek to buy all of the shares in the Target from the Seller or to acquire the business and some or all of the assets of the Target from the Target company. Accordingly, an MBI may be carried out by way of a share purchase or a business and asset purchase. A share purchase is a transaction which involves the existing shareholder (or shareholders) selling some or all of their shares in the Target to a buyer. A business and asset purchase is a transaction which involves a business owner (for example, the Target company) selling the goodwill of the business and some or all of the other assets of the business to a buyer. In the case of an MBI, the buyer will be the external Management Team (often together with a private equity provider).
It is often the case that the Management Team does not have sufficient funds to acquire the business by itself. Accordingly, in order to complete the MBI, it is necessary for the Management Team to obtain external finance.
The external finance may be provided from a range of sources including asset finance, bank debt (senior and mezzanine finance), Seller financing, private equity and loan notes. Whilst the Management Team may not be able to fund the entire transaction themselves, the external finance provider(s) (and, in the case of Seller financing, the Seller) normally require the Management Team to use some of their personal funds to acquire the business. This demonstrates the confidence and commitment of the Management Team in the MBI to the external finance provider(s).
The structure of an MBI can be complex where there is a mix of debt and equity finance in addition to personal investments from the Management Team. It often involves numerous different parties and their respective advisers and several lengthy documents dealing with the acquisition itself and the relationship between the Management Team and the external finance provider(s).
An MBI is often structured through a new company (Newco) or group of new companies. The structure sometimes involves the Management Team and the external finance provider(s) forming 2 new companies – HoldingCo and AcquireCo. The external finance provider(s) acquire a majority shareholding in HoldingCo and the Management Team a minority shareholding. AcquireCo will be a wholly owned subsidiary of HoldingCo. AcquireCo will then buy the shares in (or the business and assets of) the Target.