Do I need a management advisor?

The role of a Management Advisor is now commonplace on deals but what value do they bring for management teams in buy-out transactions?

Management buyouts (MBOs) are a common feature of the UK deals market. They are typically used to facilitate the exit of one group of shareholders or investors, whilst enabling a new investor to come in alongside the incumbent management team to support the business through the next stage of growth. In these circumstances, management often sit in the middle of the deal, which poses an important question: Do they need their own independent advice?

Key difference to sell-side advisors

Generally, the role of the sell-side advisor is to maximise the value achieved on a sale of the business (be it to a trade buyer or via an MBO) whilst minimising process complexity. Although this contributes towards the objective of maximising management’s existing value, this is only half the story. The structure of management’s ongoing investment into Newco is as fundamental as the headline price per share and must be considered through a separate lens: one which focusses purely on the ongoing objectives, interests and obligations of the management team.

Key objectives of management advisors

Management face a transaction involving complex financial structuring and will likely be presented with a range of structures from various buyers. Each with different implications for the capital structure, associated risk profile and potential future returns. Having an independent advisor by their side to dissect and disseminate each structure is crucial to achieving optimal terms respective to their collective and individual objectives.

The role of the management advisor can be split into three phases:

1. Preparation: Produce management proposed term sheet.

Work alongside management to review the current capital structure and business plan. Model return scenarios, set initial expectations and explain the typical transaction dynamics. From here, the aim is to generate a management term sheet which sets out the key guiding principles for their ongoing interest in the business.

2. Buyer Negotiation: Conclude which parties are supported by management.

The management advisors will engage in dialogue with the bidders to explain management’s position and key principles, negotiate the terms of the transaction and work alongside the sell-side advisors to best facilitate the receipt of proposals that work for all parties. The proposals are then compared and relayed back to management to conclude on which party’s they support proceeding with.

3. Delivery: Ensure successful transfer into the new structure

Once exclusivity has been granted to a bidder, the management term sheet is finalised and agreed. From here, the management advisor’s role is to protect management’s interests by working with their legal advisor to ensure the commercial terms are reflected in the legal documents. Further, they will present the terms and structure to the wider team and oversee and assist with the completion funds flow.

So, do you need a management advisor?

In our view, independent management advice is fundamental to all MBO transactions where management are required to reinvest a proportion of their current value, most commonly in secondary & tertiary buyouts. In such cases, two separate roles emerge and there is real value to management in having an advisor that is purely representing their best interests.


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