How we conducted a management buyout (MBO) on behalf of a client which operated a travel marketing PR agency.
Our client (the buyer) wanted to enter into a management buyout with another local company and needed our assistance to facilitate the purchase of 80% of the shares in the target company from its existing shareholders (the sellers).
The purchase price in this instance was comprised of a payment due from the buyer to the sellers upon completion as well as further deferred consideration payments. These deferred consideration payments gave the sellers the right to an agreed percentage of the target company’s profits for five years after the date of completion (once an agreed annual dividend had also been paid to the buyer).
The use of a deferred consideration mechanism is more commonly known as an ‘earn out’. Put simply, an earn out is an arrangement whereby at least part of the consideration is determined with reference to the target company’s future profitability for a specified period after completion. This was beneficial to our client in this case as it meant that it did not have to pay the full consideration amount upfront in one lump sum.
Due to the amount of the completion payment in this case (which was in the hundreds of thousands of pounds), the buyer needed debt finance to fund the MBO. An independent third-party lender granted the buyer a loan which it used to put towards the completion payment and the loan was repayable in equal monthly instalments over a five-year period. In return for granting the buyer the loan monies, the lender received (by way of first ranking security) a debenture and corporate guarantee over the target company.
Having the corporate guarantee and debenture in place essentially meant that should the buyer default on any loan repayments, the target company would be liable to make such repayments on demand.
How we helped / what we did
We were responsible for liaising with the lender and initially our role involved us going through the lender’s standard (but lengthy) finance documentation in relation to the loan. This involved us reviewing the debentures, loan agreement, intercreditor agreement and corporate guarantee and ensuring that the terms of these were consistent and that the documents harmoniously interlinked. We also checked to make sure that the documentation reflected what was agreed in the heads of terms.
Not only was there a corporate guarantee involved in this case, the directors of the buyer were also required to give personal guarantees in relation to the loan. We therefore had to hold a face to face meeting at our offices with the directors and take them through the personal guarantees (it is a legal requirement that individuals giving personal guarantees receive independent legal advice (ILA) in respect of the guarantees to be given). Following this meeting, we had to provide the lender with ILA certificates which confirmed that each of the individual guarantors had been advised on the overall risks involved with the personal guarantees they were entering into.
We also were responsible for drafting relevant board minutes and ensuring that all of the conditions precedent to the loan drawdown had been satisfied by the buyer. In addition, we drafted director’s / obligor’s certificates on behalf of our client as this was required by the lender.
As the form of payment for the deferred consideration payments in this case were floating rate secured loan notes, we were required to draft complex financial documentation such as a loan note instrument. The effect of the loan notes was that they reduced the amount otherwise payable by the buyer (i.e. the ‘issuer’) on the completion date, deferring the obligation to pay the shortfall to the noteholders to a date in the future at which point the loan notes are redeemed (repaid) in full.
Due to the convoluted nature of this transaction, we were required to conduct a significant amount of work in terms of drafting documentation relating to the debt finance and reviewing documents produced by the lender. This required numerous conference calls between the parties discussing what needed to be done, not to mention constant email correspondence with our client and other parties to keep everyone updated and ‘on the same page’ as to the stage that the transaction was at.
We attended a meeting towards completion at which the buyer and seller (and their legal team) were present. At this meeting the transaction was generally discussed and we presented the buyer with the final form (as agreed separately with the lender) finance documentation for them to sign.
Following the meeting, we calculated and agreed with the client the amount that they needed to transfer to our client account. We separately liaised with the lender and ensured that the correct amount of loan monies were also sent to our client account. Once we had confirmed that both amounts were received, we sent the completion payment to the seller’s solicitor’s client account which constituted completion of the transaction.
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