The abbreviation “M&A” stands for Mergers & Acquisitions and is a collective term for all processes related to corporate transactions. The following outlines a typical professional process for selling a medium-sized company. Afterwards, the advantages of a Management Buy-Out (“MBO”) and important aspects for successful implementation are considered.
TYPICAL M&A TRANSACTION PROCESS
A professional and well-structured M&A transaction process often increases the chances of success for the sale of a company and can significantly raise the achievable sales proceeds. A typical process for selling a medium-sized company can be divided into four phases with different focuses and generally spans a period of six to eighteen months. The timeline is extended particularly if a suitable buyer is not immediately apparent and investors need to be identified in the international environment.
Preparation phase: In the preparation phase, the analysis of the target company takes place. Strengths and weaknesses, as well as a market-oriented value indication, form the basis for the sales strategy. As a result, the sales story is presented objectively but appealingly for prospective buyers, highlighting the company’s value drivers. Based on the business model, industry structure, and positioning of the target company, potential buyers and investor groups are researched. Internal solutions may also be considered, such as a takeover by the existing management as part of an MBO.
Marketing phase: With an anonymous short presentation of the target company – also called a “teaser” – potential investors are contacted personally or by phone. If there is fundamental interest in the opportunity, a confidentiality agreement is signed with the prospect to regulate the handling of sensitive information and the consequences of misuse. Based on an Information Memorandum – a comprehensive sales presentation that describes the company in detail, outlines its positioning, and highlights historical special effects and future opportunities – prospects can evaluate the target company more concretely and provide indicative valuations. Impressions can be deepened, depending on the case, in personal meetings with the owners and management (“management meetings”). The goal of the marketing phase is the submission of indicative offers from potential buyers in order to enter the transaction phase with selected prospects.
Transaction phase: After analyzing and usually negotiating the indicative offers, it becomes clear whether a letter of intent will be agreed with one or more buyers. This sets out the transaction structure, purchase price, due diligence process, and implementation timeline. After signing, the seller and management, often with the help of an M&A advisor, provide extensive detailed information about the target company in a virtual data room. Buyers usually examine the legal, tax, financial, and commercial situation of the target company in parallel as part of due diligence, often with the support of specialized advisors, to assess risks. In the process, purchase price bases are confirmed, and important matters are taken into the contract negotiations.
Implementation phase: After completing due diligence, the goal is to finalize a transaction (usually with one buyer). A purchase agreement formalizes structure and pricing models, and warranties, guarantees, and indemnities are negotiated with the support of experienced corporate lawyers. After meeting possible closing conditions, the sale of the company is legally completed.
MANAGEMENT BUY-OUT – AN ATTRACTIVE OPTION FOR MANAGERS AND OWNERS
A natural solution in a company sale is looking for buyers within the company itself: An MBO refers to the takeover of a company by one or more existing managers. If financing is mainly provided through debt capital, this is called a “Leveraged (Management) Buy-Out.” In an MBO, the entrepreneur hands over their life’s work to familiar and often trusted hands. Even though management is rarely able to offer the highest price, with regard to the M&A process, an MBO has numerous advantages that should not be underestimated:
- If the circle of potential buyers is limited due to the industry or business model, an MBO represents an attractive option.
- Where strong dependencies on the owner or individual managers exist, a sale to third parties may be challenging – here, an MBO offers a promising solution.
- Negotiations with competitors carry risks despite confidentiality agreements, e.g., poaching customers or employees. “Change-of-control clauses” in customer contracts may also pose insurmountable hurdles. These risks are largely avoided in an MBO.
- With external, especially international buyers, due diligence and contract negotiation costs can rise disproportionately. Since management knows the company well, most review costs are eliminated, and contracts can be much leaner.
- A key advantage is the usually much lower liability of the seller compared to external buyers. Given management’s detailed knowledge, warranty claims and purchase price reductions are rare.
SUITABILITY OF MANAGERS IS CRUCIAL
In an MBO, the professional and personal suitability of the manager is decisive for long-term business success and for the confidence of financing partners. In addition to professional knowledge and management qualities, the MBO candidate must also have the potential to develop into an entrepreneurial personality. Strategic vision, decisiveness, and willingness to take risks are important traits. Specialized HR consultancies can support entrepreneurs in selecting suitable candidates through cognitive and psychological tests. Early preparation and ongoing external coaching can also help shape the entrepreneurial personality.
DIVERSE FINANCING OPTIONS
The most common obstacle to considering an MBO is skepticism about financing. Experienced financing advisors can help buyers build a sustainable structure from a variety of options:
Subsidies: MBOs often benefit from the same advantages as business start-ups, making public subsidies (e.g., from KfW) a useful option in combination with bank financing.
Equity: If the buyer contributes their own financial resources, this signals seriousness to financing partners. Limited funds can be supplemented with subsidies, or equity participation companies can step in, especially for larger transactions.
Equity-like instruments: Mezzanine capital, a hybrid between equity and debt, can serve as an additional building block and bridge where banks require equity.
Debt capital from banks: Bank loans generally represent the main component of MBO financing. The financing scope can be expanded with bank guarantees and alternative instruments.
