Contents Setting the scene ......................................................................................................03Getting your hou in order .....................................................................................04The investment documentation ..............................................................................06Key provisions in the investment agreement ........................................................07Key provisions in the articles of association ..........................................................08In summary ................................................................................................................09Our Private Equity practice . (09)
Contacts
Martin Winter
Partner, London
+44 (0)20 7300 4069
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Edward Waldron Partner, London
+44 (0)20 7300 4968
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Nick Hazell
Head of Private Equity, London
+44 (0)20 7300 4736
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Tom Cartwright
Partner, London
+44 (0)20 7300 4969
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James Goold
Partner, London
+44 (0)20 7300 4207
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Robert Fenner
Partner, London
+44 (0)20 7300 4986
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Emma Danks
Partner, London
+44 (0)20 7300 4718
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Setting the scene
You are a key member of a management team for a business which is up for sale. It may be one which is part of a larger group, a public company eking to go private, or even a business owned by institutional investors looking to exit. Whatever the reason, you are part of a team that has succeeded in attracting the interest of a private equity investor to fund a management buy-out of the business. Alternatively, you could be a manager whom the private equity investor is looking to integrate into the team. In either situation you would be right to think that the greatest challenge you face as part of the management team is to deliver (and convince the private
二等功有什么待遇equity investor that the team can deliver) on its business plan by taking the business forward and generating target returns for the team and the private equity investor. There is no doubt though, that the legal and transaction process for a management buy-out prents you with some challenges too, challenges which this guide eks to explore.
Rocket science and the world of private equity
For many managers, embarking on a management buy-out involves being faced with a whole new vocabulary and a range of issues not faced before and emanating from an array of different advisors and consultants. The good news is that none of this involves rocket science!
The jargon can nonetheless be bewildering. You may not have been told that ‘private equity investor’, ‘venture capitalist’ and ‘institutional investor’ are pretty much interchangeable terms. Likewi, you may not have had explained to you the distinction between an MBO (a management buy-out where the existing management team buys out the business it manages), an MBI (a management buy-in, where the institutional investor brings in a new management team from outside), a BIMBO (part management buy-in, part management buy-out) or an IBO (an institutional buy-out, where the institutional investor ts up a company to acquire a business and gives management a small stake either at the time of or after completion of the deal). You also may not have been told that the term ‘leveraged buy-out’ is short-hand for any of the types of transactions.
It is the leverage element, i.e. debt, which is fundamental to generating the desired level of returns for the institutional investors and management team alike. The acquisition debt finance adds another layer of jargon and complexity as you are introduced to the joys of nior and junior debt. Senior debt is usually advanced by commercial banks and so called becau they normally take first-ranking curity over the asts of the business. Junior debt, often referred to as mezzanine debt, is so called becau it ranks behind the nior debt but ahead of equity (and probably all other uncured creditors). Do not necessarily be impresd by a larger shareholding percentage offered
by one private equity investor over another where the larger percentage ranks behind, for example, very expensive debt. Being at the bottom of the pile when the cash is divided up on an exit means that you may simply be entitled to a larger percentage of fresh air!Understanding your institutional investor
The jargon may be unfamiliar at first but understanding what drives an institutional investor on a leveraged deal is simple. Esntially it is getting the right mix of equity and debt to leverage the equity returns. This will be determined by confidence in the strength of the business plan and the amount of debt it is believed the business can support through its free cash flow.
The institutional investor, once sufficiently impresd by the management team and business to show an interest in investing, will look to its lawyers to prepare documentation to protect the investment. T o the uninitiated, the protections may em over the top, suffocating even. It is tempting to think that the institutional investor is looking to control the business and impo a straight jacket on management. This is almost never the ca. Institutional investors approach investments with heavy duty documentation to ensure that a basic level of protection for their investment is maintained, while the management team is left to run the business. You would probably be happy about this approach if it was your pension money that was being invested!
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Having an understanding of what protection an institutional investor will expect and a realistic
expectation of what safeguards the managers should be able to negotiate for themlves, is an
important part of straightening the often winding road to completion. You should look to your
legal advisor to lead you through this particular maze.
Getting your hou in order
Having a credible and robust business plan is esntial. Key to moving from the initial interest
shown, to closing the deal with an institutional investor, is already having your hou in order.
The private equity investor, the debt providers, their lawyers and accountants and possibly
other specialist advisors, can be expected to do due diligence on the management team, the
business, the market and the business plan. This means that thorough preparation needs to be
undertaken by the team.
The management team
As location is to property, so management is to management buy-outs. The quality of the
team is crucial and the private equity investor will, to a great extent, e the buy-out as an
investment in the management team, so you will need to choo your team carefully from the
start. You will need to ensure that, in addition to all-round strength, the individual members of
the team have the different capabilities and attributes required of the team in the key business
areas and that each justifies their inclusion on merit.
The typical positions that need addressing, depending on the specific business needs, include:
Managing Director / Chief Executive Officer - a clear leader with strategic vision, ambition
and drive is important in uniting the team and driving the business forward.
Finance Director - demonstrates intimate knowledge of all accounting information,
competent in forecasting and budgeting and understands how changes in the business
environment impact on results and budgets.
Sale / Business Development Director - a key driver of revenues and potential new business
who is results-driven and capable of motivating others.
Operations / Production Director - has a clear and practical understanding of the business
process, technology (if relevant) and techniques, as well as being able to control
production costs and capital expenditure.
Protecting the business
As with any business where buyers or investors are being courted, you can avoid a lot of
headaches, and possibly the transaction going off the rails completely at a later stage, by
working to ensure that the contractual and other legal arrangements in all business areas are on
谭晶的歌曲a sound footing before institutional investors are approached. Whilst this is good advice for any
business at any time, it particularly pays to concentrate on this during the period prior to due
diligence and negotiations. Areas to focus on might include:
Commercial contracts - formally documenting the terms upon which commercial
DNS负载均衡relationships which are key to the business are conducted, such as tho with suppliers,
如何申请专利customers, agents and distributors, will give investors clarity and confidence in what they
are investing in and underpin the business plan. Having complete and signed copies of tho
terms is important!
Intellectual property, know-how, trade crets and brands - putting in place measures to
take stock of and protect the, very often important, asts from onward disclosure or
infringement can be esntial.
Litigation - actual and potential commercial disputes should be monitored, assd and
managed to minimi their impact on the value of the business.
Long-term financial commitments and revenues - you should review and apprai the
contractual basis of long-term commitments and revenue flow, e.g. property and equipment
leas and customer contracts, so as to appreciate the degree of flexibility available to
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change strategies or manage costs and the reliability of revenue streams.
微信名符号Stand-alone issues - if the business is part of a larger group, you need to asss the extent to which, for example, head office is relied upon for business rvices and infrastructure which will have to be budgeted for and sourced independently following the buy-out and plan accordingly. Relevant areas may be payroll, tax planning, audit, IT systems, software and hardware.
Focusing on the issues at an early stage should make the transaction process an easier one. However, at the same time, you also need to be sure not to lo sight of your fiduciary duties as company directors or the task of running the business. You risk breaching your fiduciary duties if you do not run the business in the interests of its current shareholders.
Therefore, spending company time and expen on your proposal as well as passing confidential information to third parties should not be done without the shareholders’ prior approval. It is crucial that the company’s performance is in-line with expectations during the buy-out process. An unforeen dip in turnover or profits at this stage can lead to less favourable investment / lending terms or, possibly, to investors walking away from the deal.
Understanding the risks in the business
An institutional investor’s confidence in a management team will stem in large part from its
asssment of the strengths and weakness of the business and the robustness of its business plan. When eking funding you must, therefore, be able to demonstrate:
that your business has depth and breadth in its revenue streams, suppliers, customer ba and its management;
an understanding of your market, industry and the trends they face over the next few years; an understanding of the competition, their strengths, weakness and how their market position will develop;
how your business will respond to the challenges.
The best demonstrator that risk will be under control is your team’s personal experience and your business track record.
Due diligence
Once you have found potential investors and before you get down to negotiating the investment documentation, they will want to undertake due diligence to gather more information about you, your team, the company and its products. The due diligence process requires tho ‘in the know’ to divulg
e everything they know about the investee company to the potential investor, enabling it to make a fully informed asssment of the value and potential of the company. It can be a tedious and time-consuming exerci, but this can be alleviated if you are prepared for it.
Legal due diligence will form only a part of this exerci. The financial due diligence will be key and there will also typically be commercial, environmental and insurance due diligence exercis undertaken at the same time. Sellers may commission their own due diligence (known as vendor due diligence) in advance to expediate the process.
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The investment documentation
A large number of different legal documents are a common feature of leveraged buy-outs.
Tho most likely to be involved (aside from the acquisition agreement itlf) include the
following:
Confidentiality agreement
Before terms are discusd and information is exchanged, a confidentiality or non-disclosure
agreement should be put in place to keep a lid on the detailed negotiations and to safeguard the
crecy of information supplied throughout the buy-out process.
Term sheet
Once the key terms of the investment have been agreed in principle, a term sheet (sometimes
referred to as a heads of terms, memorandum of understanding or letter of intent) may be
prepared and agreed. Although the term sheet is not in itlf legally binding, a carefully crafted
term sheet will assist in drafting the investment documentation, as it will be a record of the
intent of the institutional investors and the managers. It should not only record the commercial
主持人演讲稿terms, such as valuation, but also the rights attaching to the managers’ and the institutions’
shares to ensure there are no big surpris in the investment documents.
Investment agreement建安风骨
The institutions will have specific rights which have to be negotiated, such as the appointment
of a non-executive director, veto rights and other rights protecting their investment. The are
t out in a shareholders’ agreement entered into between the institutions and the managers. It
is more commonly called an investment or subscription agreement.
Articles of association
In addition to containing the usual internal rules covering governance and shareholder rights in
the buy-out vehicle, the articles will also be the means by which many of the investment rights
and protections will be formalid, e.g. the right to receive a particular level of dividend and share
transfer rights, requirements and restrictions.
Debt instruments
By definition, the will feature on any leveraged transaction and could range from conventional
acquisition and working capital facilities to less conventional forms of debt which can take a
variety of forms, such as loan notes, payment in kind notes and deep discounted bonds. The
terms of the instruments will vary depending on the specific economics of the buy-out and
could be cured or even have conversion rights, for example. The impact of the interest rates
attaching to the debt instruments issued to the institutions should be carefully modelled and
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understood. This will t the hurdle which needs to be achieved before there will be any return
on your equity.
Directors’ rvice contracts
You and any other managers making up the team will continue to work in the business. It is
usually the ca that your terms and conditions of employment are reviewed and, if necessary,
renegotiated as a part of the overall investment negotiations. T ypical issues include notice period,
non-competition arrangements and bonus structures.
Personal tax position regarding managers’ shares
This requires a brochure in itlf! However, signature of the correct tax election and due
consideration of the issues should avoid most problems.
The following ctions highlight the key areas of protection for institutional investors and
managers alike in the two documents which are perhaps most central to the equity investment:
the investment agreement and the articles of association for the buy-out vehicle.
