Using Private Equity for Management Buyouts

1 Day In-House Training Course

A private equity financed management buyout and a subsequent exit via flotation or trade sale is a very high risk/high reward exercise suitable only for well motivated and entrepreneurial management teams.

This 1-day, in-house, training course explains the objectives and roles of the entrepreneurs, financiers and advisers involved and the manner in which a successful transaction can be structured and achieved. The financial instruments employed are examined in detail together with the overall structure of the deal.

Course Outline

  • The Objective of Private Equity?

    • An Alphabet Soup of Specialised Activity – MBOs, MBIs, BIMBOs, VIMBOs, IBOs, LBUs
  • Selling a Company to the Management

    • The Vendor’s Perspective – preparing the management team & estimating the value
    • The Management’s Perspective – a speculative ‘all eggs in one basket’ deal
      • How much should they invest? – the concept of a hurt value & an envy factor
      • What percentage equity should they get? – does the potential reward match the risk
      • Initial Estimate of Price – a ‘back of the envelope’ calculation
    • Is the Business Suitable for an MBO? – essential management & economic requirements
  • The Parties and Their Roles

    • Private Equity House – typical structures & investment objectives
      • Warranties – what a PE House will ask for and what an MBO team should give
    • Reporting Accountants – principal areas for investigation and risk assessment
    • Solicitors – how many are necessary? can they double up?
      • Acting for the Private Equity House – legal due diligence & transitional arrangements
      • Acting for the Vendors – negotiating the limited warranties offered by Vendor to PE House
      • Acting for the MBO Team – lock-outs, service contracts, good leavers/bad leavers
      • Acting for the Lenders – negotiating the loan documentation
  • Structure of an MBO deal

    • Distribution of the Equity – sweet equity, quasi equity & ratchets
    • Legal Documents Required – shareholders agreement, articles of association etc.
    • Senior Debt – the core acquisition loan
      • Mix of Facilities – overdrafts, term loans, revolving credit facilities
      • Methods of Repayment – amortisation, bullet & balloon repayments
      • Stretch Debt – alphabet notes to match anticipated cash flow
      • Security – fixed charges, floating charges & mortgages
      • Second Lien Debt – subordinated to senior debt, same collateral?
    • Junior debt – everything below the senior debt
      • PIK – ‘payment in kind’, ‘pay if you want’, ‘pay if you can’
      • Vendor Loan Notes – commercial reasons for their use
      • Mezzanine Debt & Zero Coupon Bonds – the swing factor in the structure
      • High Yield Bonds – protected against re-investment risk?
    • Complexities of Public-to-Private Deals – the ultimate ‘caveat emptor’ acquisition
      • Handling the Funding Risk – the three debenture approach
    • Tax considerations – the management, NewCo, TarCo, the PE House & the vendor
    • Insurance – particular requirements & general check list
    • Pension Scheme – an asset or a liability?
  • Exit Routes

    • Plan the Exit From Day One – a management team attitude valued by a PE House
    • Likely Conflicts of Interest – should be anticipated by the PE House & the MBO team
    • Trade Sale – will the MBO team be able to exit with the PE House?
    • Second Round Buy-Out – an experienced MBO team will negotiate from strength
    • Flotation – will the MBO team accept public accountability, greater liability & potential lack of liquidity?

Course Notes, Slides and Exercises

Participants will receive a booklet containing copies of 17 slides and 78 pages of very comprehensive notes. Each slide will cover a number of related topics and the accompanying notes will support the content of the course to be delivered by the trainer.

During the course of the day, participants will undertake one or two exercises (problems) in groups of two or three (depending on the size of the class) which will involve considering what advice should be given to a client in particular circumstances. Participants will discuss the exercise with each other and then with the trainer and will receive a written answer to the problem.

Exercise 1

An MBO team wishes to purchase the company that employs them and have given you a copy of the balance sheet and a profit forecast for the next three years. They ask you to advise them what percentage of equity in the buyout vehicle they should seek to negotiate with a private equity house when raising funds to finance the proposed deal.

Exercise 2

Following your advice, the MBO team has agreed the funding requirement in principle with a private equity house and also the initial equity split between the managers and the investors. The final split of profits, however, will be subject to a ratchet, dependent upon the IRR required by the private equity house. The MBO team asks you how best to negotiate the ratchet.