Who will advise the team?
The choice of Corporate Finance Adviser is key. An accountancy firm that has conducted the company audit for years or who completes tax returns for the prospective CEO is not an appropriate choice. It is vital to get the right corporate finance adviser on board who brings transaction experience and deep knowledge of the funding markets.
How much will the team members be expected to personally invest?
Management will ordinarily own a disproportionate proportion of the business relative to what an incoming investor is paying (formally called the “envy ratio”). As a rule of thumb, management should be expected to invest anywhere from six month’s to one year’s gross salary to demonstrate commitment and have some ‘skin in the game’.
Are there or what if there are any gaps in the management team?
An incomplete team is not necessarily a hindrance and gaps can generally be plugged. However, a strong leader is essential and funders will want to understand your staffing strategy.
In identifying any gaps, consider the impact on the team’s resources of any lost ‘group services’ (accounting and credit control, tax & treasury).
Who will lead the management team and co-ordinate fund raising efforts?
The team should nominate one person to lead the process and negotiations. This is normally but not always the CEO. Whomever is chosen, it is imperative that the other team members believe in that individual’s ability to manage the process thereby affording them the time to focus on the day-job.
Will management be expected to give warranties about the business?
Management is in a privileged position and would be expected to give straightforward assurances about factual matters. The extent of the warranties given and limits on group and individual’s liability is a matter for discussion and negotiation at the legal stage of the transaction.
Specialist insurance packages are available to cover for warranty claims but the premiums are expensive.
Liability under warranties can be inter-alia ‘joint & several’, ’several’, ‘capped’, subject to de-minimus levels and time dependent. Legal advice should be sought to understand the significance and implications of each.
Will management be expected to give personal guarantees?
Debt and other asset funders might seek more security than is available from company assets and may require the signing of personal guarantees. This adds an extra element of risk to the management team and requires careful consideration. The extent to which these are given are subject to negotiation.
Is there any tax relief for the management team?
Appropriate tax planning advice is needed to ensure that the management team takes full advantage of tax efficient schemes where possible. The management team should consider establishing EMI options schemes for senior management and also ensure that business asset taper relief provisions are followed to reduce the effective CGT liability for management to 10% on the ultimate disposal of their shares within 2 years of completion.
It should be possible, providing that certain conditions are met , for MBO team members to claim interest tax relief for interest incurred on borrowings undertaken to provide funds to a company. If the buy – out ventures fails, income tax relief may be available on the loss incurred on the shares of the Newco.