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What Is A Company Buyout? - Q and A

Q. What is a buyout?

A. A buyout is a generic term which describes the acquisition by a management team, backed with equity or debt finance, usually of an established business which has a proven revenue stream and generates a positive cash-flow.

Q. Why would you sell?

A. A seller may choose to sell for a variety of reasons. For example, a business may wish to sell one branch of its non-core business in order to focus on its core activity. This may be strategic in order to defend or pre-empt a hostile takeover bid. Alternatively, it may be due to the seller wanting to release funds for investment elsewhere, or ease financial pressures that may be found in other areas of the business.

Q. Are there different types of buyout?

A. Yes – A buyout can take place in a number of different forms, producing various end results for the company. The most common types of buyout are: Management buyout, whereby the current management remains in place once the acquisition has taken place. Management by-in, takes place when a new management team takes over the running of the business following the acquisition. A Buy-in management buyout is a mixture of the two previous types whereby some of the current management team stay on following the acquisition with new management team members also brought in by the equity investor. In all of the above it is usually the case that the management team will hold a minority stake in the company with the private equity investor holding the controlling interest. In certain circumstances a buyout may take place which is financed by the companies debt, and they are known as Leveraged buyouts.

Q. How does the sale process start?

A. The process may vary on a case by case basis, however once the decision to sell a company has been made, the seller, and in most cases the management team will initiate the sale process by preparing an Information Memorandum and a business plan which sets out detailed information about the business and highlighting the desire for investment. All relevant information can then be gathered for the purpose of setting up a data room, which may be either physical or online. At this stage any potential investors should be made to sign a confidentiality agreement, which ensures that any confidential and sensitive information about the company is kept confidential. Once a preferred investor is identified then the seller and the potential investor may wish to enter into a Heads of Terms Agreement which sets out the principal commercial terms of the agreement. In addition both parties may decide to enter into an exclusivity agreement to prevent the seller from negotiating a similar proposal with a separate party.

Q. What happens once I have found an investor and reached an initial agreement?

A. Next, the investor will want to identify whether they wish to proceed with the investment by identifying potential areas of risk in the business and any third party consents and approvals that may be needed, this process is known as due diligence. Due diligence can sometimes be simple if the investor already knows a lot about the company and feels comfortable with the investment, on the other hand it can be an extensive and detailed exercise covering such areas as: (i) Financial – the investor may wish to instruct an accountant to carry out a review of the business model and undertake tax due diligence; (ii) Legal – key areas for legal review are constitutional and corporate review such as board structure, share structure and any shareholder agreements or company articles of association. Lawyers will also review financing arrangements, commercial contracts, employment contracts, properties, litigation and various other potential legal issues.

Q. The investor has decided they wish to proceed, what documents are needed?

A. There key transaction documents that are needed for a buyout are a Sale and Purchase Agreement, Articles of Association, an Investment Agreement; and a Facility Agreement and other Security documents.

If you would like further information about a current or prospective buyout, whether you are a seller, management team or potential investor, the Fosters Commercial team would be delighted to assist. Email the team today commercial@fosters-solicitors.co.uk or call 01603 620508

For more information on Fosters Commercial department, including testimonials and legal services we can offer your business please follow this link to the Fosters Commercial page.

This article was produced on the 18th December 2014 by our Business & Commercial team for information purposes only and should not be construed or relied upon as specific legal advice.