Unternehmensnachfolge durch Management-Buy-Out

Management buy-out is understood as the transfer of a company to its (senior) employees or management. Therefore, the management buy-out is an interesting instrument of business succession in small and medium-sized enterprises for both the previous owner and the successor. Particularly in family businesses where there is either (currently) no heir or the heir is (currently) not interested in continuing the "business", the sale to the existing management is an excellent way to ensure the continuity of the business with continuity in the management.

The special charm of this business transfer lies in the fact that the management of the company is already familiar with the structures of the business. In addition, in many cases the commitment of the acting persons to the company facilitates the sales negotiations. However, the dual function of the management is not without problems. On the one hand, the managers are obliged in their function as corporate bodies to safeguard the interests of the company in the course of the sales negotiations. On the other hand, the management regularly also endeavours to conclude the negotiations with the goal of the greatest possible personal advantage for themselves as future shareholders. 

In addition to this conflict of interest, the success of a management buy-out is largely dependent on its financial viability. As a rule, the management itself will not have sufficient equity capital. For this reason, a high proportion of the purchase price must be financed by debt. In this way, however, the company becomes not only a security but also a source of finance for the potential successor. However, the basic prerequisite for purchase price financing and thus a successful management buy-out is sufficient financial resources for the company itself and its stable development.

At first glance, the most obvious option for closing the management financing gap is a loan from the previous owners, which is paid off in instalments from the company's earnings. This approach entails two risks: On the one hand, such a procedure requires a high willingness to take risks on the part of the former shareholders, since they bear a not inconsiderable part of the financing burden. On the other hand, the new owners are dependent on the previous owners and there may be a conflict of loyalty among the company's staff. This is because the existing shareholders usually allow themselves extensive rights of co-determination even after the transfer of the company in order to secure their commitment. However, since the interests of the old and new bosses are not necessarily congruent, this can quickly lead to a conflict of loyalty among the workforce in the event of conflicts over the future strategic direction of the company and the associated investments between the previous and new owners.

An alternative and often less problematic option is for the previous owners to finance only part of the management buy-out through a bearer loan and for the remaining financing requirements to be taken over by a bank and/or financial investors such as private equity companies or family offices (asset management). As a rule, a subordination is agreed for the bearer loan, which gives priority to the bank's repayment claim. Only when this has been repaid does the previous owner's loan become due. The charming thing about this type of financing is that the previous owner basically defers the purchase price to the management in return for interest payments.

In addition, full financing by financial investors is also conceivable. The downside of this variant, however, is the influence of the private equity investor on the company's management. Unlike banks, the investor's interest is not only to get back the invested capital with interest, but also to end his investment after a certain time with a lucrative exit. Consequently, financial investors regularly tie their investment to weighty co-determination rights in the company management. These can certainly lead to conflicts in the company's orientation. The challenge of (partial) financing through private equity lies in the fact that the management must accept that the financial investor will (also) have an ongoing say in the company's development.

The choice of the form of financing is followed by the form of the company agreement. In the context of a management buy-out, the financial investor will usually not participate in the company directly, but rather indirectly via an acquiring company, the so-called "NewCo". In order to avoid a commercial co-entrepreneurship, this NewCo is usually structured as a corporation and the management will regularly not have a stake of more than 15 percent. The participation in the NewCo itself takes place either through the direct acquisition of shares or the takeover of shares within the framework of a capital increase. 

For the legal relationships within this acquiring company, the financial investor and the management usually conclude an agreement in which, in particular, the joint investment, the objective of the investment and the exit of the investors are regulated. Since the shareholders naturally want to participate jointly in the increase in value of the company, the agreement contains provisions on the sale of shares outside of an IPO to third parties. In certain cases, these can create a drag-along right or tag-along right for the managers. In addition, anti-dilution clauses (subscription rights, retention of the capital structure, etc.) can be agreed for capital measures of the shareholders. The distribution of the exit proceeds is usually based on the equity shares within the NewCo, although deviating proceeds distribution agreements are also possible.

Upon termination of the manager's employment or board position with the company, the manager concerned may be required to sell and transfer his shareholding (so-called call option). This also applies in other expressly contractually regulated cases. However, in certain cases the manager has a right to tender (so-called put option). In practice, the repurchase price is based on the reason for leaving the company. In concrete terms, a distinction is usually made between the so-called good leaver, i.e. the manager who leaves due to death, disability or termination for reasons for which the manager is not responsible, and the so-called bad leaver, i.e. the manager who was terminated for good cause for which he or she is responsible (e.g. due to a breach of duty) or who voluntarily leaves the company within a certain period of time since starting work. In good-leaver cases, payment is made for the market value of the shares, in bad-leaver cases often only for the difference between acquisition costs and market value. The time of payment can be upon exit or upon the occurrence of an option case, which is regularly a question of the liquidity of the option opponent.

This means that the entrepreneur does not only have the option of a testamentary regulation of his inheritance for his succession planning in the company. Rather, a management buy-out also offers the entrepreneur a transitional solution. With this transitional arrangement, the company management can continue to run the business on an interim basis until the actual successor is ready to take over. In this case, it is important to consider at an early stage who should be considered as the successor, how long such a (transitional) solution should last and whether the external manager should be integrated into the company as an employee or whether he should receive a share in the company. As a permanent succession solution, the sale to the company's own management is an interesting alternative. For both management buy-out variants it is equally important to strategically align and position the company in good time. This includes not only the establishment of a management team that ensures continuity under new leadership or a new owner, but also the early identification of profit priorities. In this way, companies achieve a higher cash flow and thus a higher enterprise value even in succession situations. Finally, the rights of the financiers should also be clearly and practicably regulated in the contract.

The Corporate Team of SKW Schwarz will be happy to assist you with questions in connection with a management buy-out or, more generally, with the establishment and legal structuring of your company.