1) What is a Management Buy Out transaction (MBO)?

A Management Buy Out simply refers to the process of a Vendor selling all or the majority of their equity interest in a business to their existing Management Team as opposed to an external sale to a trade buyer or corporate acquirer.

2) Are there different types or variations to a Management Buy Out?

Yes. The Management Buy Out (MBO) is the core transaction alternative to a business sale to an external party however Management Buy In's (MBI) also exist whereby an external Manager or Management Team is identified and sourced to buy out the business. This might arise where existing management do not wish to participate in the buy out through age or other circumstances.

Similarly a deal known as a Buy In, Management Buy Out (BIMBO) exists whereby a combination of existing management and external management collaborate to acquire or buy out a business from the Retiring Vendors. Refer point 5 below.

3) Why should a Vendor seriously consider a Management Buy Out as a superior alternative to other more conventional business exit strategies?

Unlike most trade sale negotiations and sales processes, the Pre-Packaged Management Buy Out© transaction offers benefits to both the Vendors and prospective Management Team including:

Vendor Benefits:

• Ability to achieve a "Headline Price" with certainty compared to the discounting tactics and protracted behaviour of trade buyers
• Ability to conduct the sales process confidentially within the "four walls" with prospective Management and avoid trade buyers [competitors] prying through the business' accounts, financials, tax records, trade secrets or Intellectual Property
• Transaction project managed via external Project Manager aligned to the successful completion of the transaction in 8 – 12 weeks of engagement
• Opportunity to reward loyal management with ownership
• Ability to lay down a formal succession strategy particularly for family owned and operated businesses
• Certainty afforded through the pre-packaged method and approach ensuring vendor's are confident of success before they approach potential Management candidates
• No funding of purchasing management required instead the business’ capacity is secured to fund the transaction
• No time billers or hidden fees
• Focus on completion of the deal, not maximisation of the fee potential of the Vendor
• Simple deal structures with straight answers from the Experts
• Deal fees built into the funding structure i.e net proceeds = gross proceeds with deal costs funded over and above headline price

Purchasing Management Benefits:

• Minimal management equity contribution required
• Personal guarantees and second mortgages not typically required
• Opportunity for significant return on equity and wealth maximisation
• Full or majority Ownership upon Settlement
• Wealth Creation beyond the passive investment alternative
• Access to a business normally out of Management’s price range or expectations

4) What ongoing risks exist for the Retiring Vendor’s realising their price and the sale proceeds post transaction?

In most of the transactions Ennovate Corporate Finance participates and advises on, the nexus between full realisation of the headline price and the ongoing business risk is completely removed for the Vendors ensuring they achieve and realise their headline price expectations irrespective of the ongoing performance and solvency of the business.

5) What if only 2 of the 3 existing Management Team members are interested in an MBO transaction?

We come across these scenarios all the time. Ennovate Corporate Finance through its corporate partner network is able in most cases to identify and procure the temporary or full time services of a Functional or General Manager to fill a skills gap in a management team with equity offered sometime after the appointment subject to performance hurdles and employment milestones being achieved. This is called a Buy In Management Buy Out or BIMBO. Similar structures exist to accommodate a range of different circumstances.

6) Does the Retiring Vendor have to sell down 100% of their equity to Management?

No. However the preferred practice is for the Retiring Vendor to sell the majority of equity upon settlement to effect the new ownership arrangements. This scenario is preferred for a number of reasons including:

• Certainty of completing on original transaction terms. In contrast to a non contracted or optional equity drawdown scenario where Purchasing Management's sentiment to the original sales price might deteriorate due to softening market conditions or firm specific factors reducing the value of the business leading to transaction collapse mid term
• Clear lines of accountability where Purchasing Management have majority ownership post sale particularly where a dominant Vendor "ran the show" previously
  Funding parties take a more favourable view to business cases where majority equity is to transfer at settlement
  Minority shareholders potentially suffer from "oppression" by the majority shareholder [Previous Vendor] and their equity can be discounted given the differing power stakes and/or illiquid market for their shares

7) Can the Retiring Vendor retain some equity or rollover capital to capture the upside of a booming business?

Yes. This is an ideal scenario for Vendors wishing to sell down most of their equity to Purchasing Management yet provide a small but potentially growing dividend flow possibly in retirement post sale. Similarly, Purchasing Management are often very keen to retain the previous owner in some capacity especially in the early days of ownership.

8) What does Ennovate Corporate Finance do exactly?

Ennovate Corporate Finance is essentially the Project Manager of the Pre-Packaged Management Buy Out© transaction ensuring a properly constructed project including goals, milestones, critical path elements and the multitude of parties are proficiently managed in an expeditious and focussed manner to ensure a successful completion.

With respect to the activities Ennovate Corporate finance coordinates and manages end to end, these include but are not limited to:

• Identifying and constructing feasible MBO transactions for Retiring Vendors and Prospective Purchasing Management
• Facilitation of business plan and related documents
• Liaising between Vendors and Purchasing Management
• Negotiation on commercial elements of the deal
• Facilitation, development and consensus on the Heads of Terms or Agreement
• Introduction and referral of specialist Professionals i.e accounting and legal partners to execute and complete formal documentation, advise on tax and structuring matters
• Facilitation of the Sale and Purchase Agreement, Shareholders Agreements and New Company formation
• Overarching project management of disparate Professionals, tasks and activities from engagement through to completion
• Scoping, preparing and sourcing buy out funding

9) How is Ennovate Corporate Finance paid?

Ennovate Corporate Finance is paid two ways:

• Engagement Fee: This is a modest fee payable upon Engagement enabling Ennovate to engage professionals from the outset to conduct Valuation analysis, Cashflow modelling and projections and scenario testing. This is a non-refundable fee. Our services are documented in the Engagement Letter.
• Success Fee: The majority of our remuneration is via the success fee which is a % of target funds that is total funds required to effect the sale, pay professionals and Ennovate for its services and any other financial instruments or arrangements required to execute the transaction.

Note: The Engagement Fee is offset against the Success Fee which is due and payable from settlement funds.

10) How do we commence discussions and is there a fee?

No. We like to approach the initial discussion without any money changing hands in order to understand the initiating party's goals and aspirations, management capability etc. In addition we like to ascertain the nature, size and type of enterprise they operate and their corporate objectives. Only after this initial discussion and all questions have been addressed comprehensively does an Engagement Fee become payable.

11) What is the minimum Sales or Enterprise Value to commence a Pre-Packaged MBO transaction© with Ennovate Corporate Finance?

At least $1M, no maximum.