Vendor Funded vs Deferred MBOs

Posted On September 21, 2017 By mhauk

The Management Buyout (MBO) is re-emerging as a popular succession route. We have also seen variations of it, including Vendor Funded and Deferred MBOs. The former requires no external funding but where the owner is happy to exit immediately. The latter structure is used when the owner wishes to exit in stages, whilst maintaining a degree of control over the process. In the Deferred MBO, the initial stage should set out the mechanisms for the complete exit at a future point in time.

The exact form of these deferred mechanisms will depend on the nature of the parties, their plans and working relationship. Where the full exit value is not confirmed up front, issues that need to be agreed include the valuation method (i.e. relevant earnings, multiplier and any debt calculations), indicative timing, and any key conditions e.g. retaining a key contract. This additional layer of detail provides clarity for the forthcoming MBO team in terms of their direction of travel and enables the vendor’s advisors to review the tax position carefully and seek any clearances in advance.

Any exit will include a handover role for the exiting shareholder, but arguably it becomes more important in a deferred structure. This is because, under both methods, the owner is not receiving all of their consideration up front and value and cash needs to be generated between the stages. These models also provide the MBO team with time to develop their roles and complete the handover while the owner is still engaged as a result of the deferred consideration or stage payment. This provides an opportunity for a structured programme to be put in place to ensure a smooth handover by the date of the final transaction.

It is important that this time is used positively, with the exiting team stepping back and the new team stepping up to take their place. It also provides time for the advisors to work with the management team to ensure they clearly understand financial information, start to think strategically and line up any funding required for the final transaction.

If you would like to discuss your succession plans with us or if you are a management team and would like to discuss a potential transaction, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Corporate Finance team.

This article originally appeared on the blog of our member firm, Broomfield & Alexander.