In the context of selling a company or business, a well-prepared management team is significant factor in improving deal certainty and ensuring that the sale process runs smoothly. Regardless of the industry, buyers will scrutinise the management team as closely as the company’s financial performance. Ultimately, having the right management team in place could lead to better terms for the sellers.

Building the Team

Putting your management team in place can be the first step in your sale preparation. Not only can the right management team assist in the due diligence process (see below) but it can be key ingredient to a purchaser’s appetite for a deal. It will take time for a management team to bed in and understand the business, so consideration not only needs to be given as to who to bring in (externally or from within), but when to do so. We are often approached by owner managed businesses looking for an exit (and often for retirement), when they are the only managers in place. This can seriously impact timing and success of a transaction. So addressing the issue early in the preparation process is key.

Management’s role post exit

Buyers tend to be more confident in a transaction when continuity from senior management post transaction is available. There are relatively few deals where a new management team is parachuted in a day one, so a buyer needs continuity of management to be in place. A buyer will often look to use a combination of restrictive covenants and incentives, in order to retain a management team post deal.

A management team will need to be onboard with the arrangements, and so advanced conversations concerning transaction incentives, future roles and expectations can help minimise potential disruptions. 

As the knowledge and experience of the management team is firmly connected to the value of the business, in particular where earn outs or deferred consideration are involved, the right team can have a huge impact on the value a seller realises.

Preparing for Sale Due Diligence

A buyer’s investigation and research of the target company is an integral part of the sale process. It is natural for management teams to be deeply involved in financial, legal and commercial due diligence. 

Management’s awareness, responsiveness and promptness during buyer’s due diligence forms a strong impression on potential buyers and helps to maintain momentum. In addition, undertaking preparatory due diligence before the sale process commences can help management and the owners to get the necessary information in good time and to identify potential pitfalls and deal with them pre-emptively. An experienced management team will know what to look for, and can help a business get in shape easier. This will also increase management’s understanding of the business and ultimately their preparedness for the transaction. The right management team is therefore vital. 

Management Buyout

As well as playing a key role as set out above, a management team may be the source of an exit for a seller.

A Management Buyout (MBO) involves the company being purchased by its management team. This is one of the most organic ways of acquiring the business, as the management team possesses deep knowledge of the business. This allows for a smooth post-completion transition and helps to minimise operational disruptions. It has various benefits for a seller, such as a potential reduction in the warranties given to the buyer (as the management know all about the business), but it also often has a deferred payment structure, so confidence in the management team’s future success (and therefore the ability to pay) is key.

To complete an MBO, the management team usually need to secure sufficient financing, whether through private equity investment, banking facilities or ad hoc arrangements with the sellers. It is therefore important, in the context of a successful MBO, to maintain clear communications between the management team, the sellers and prospective funders throughout the transaction process and ensure realistic financing and payment structures can be agreed upon by all parties.

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If you would like to discuss any point raised in this article, please get in touch with our corporate team and we would be happy to help.