presentation 5 things you should know before doing an mbo
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5 Legal Things You Should Know Before Doing an MBO
Tony Edwards, Partner, Stephenson Harwood
January 2010
Law firm of the year
Route map
Introduction to Stephenson Harwood
Be prepared!
Choose the right financial backer
Key issues to consider
Risks
Lonlive/9888077.1
About Stephenson Harwood
A full service international law firm with some 100 partners and over
500 staff worldwide.
We have a leading corporate finance practice with strength in numerous
markets including TMT, financial services, real estate, hotels & leisure,
natural resources, FMCG and transportation.
Recent accolades include:
–Law firm of the year (British Legal Awards 2009)
–Finalist for mid-market corporate team of the year (The Lawyer 2008)
Proud to be preferred legal partner of AngelNews!
The kind of top client service that is hard to find
Our Private Equity Expertise
Anglia Maltings
Advised MBI team on acquisition of a UK maltings producer with backing from a consortium of high net worth investors
LoveFilm
Advised on the merger of LoveFilm and Video Island and the restructuring of underlying shareholdings
Morgan Grenfell Private Equity
Exit of funds managed by MGPE, the private equity division of Deutsche Bank, from Grifols SA, the Spanish pharmaceuticals company
Bank of Scotland
Advised BoS on MBO of United Income Benefit Holdings Ltd. a leading provider of employment related insurance products
Premier Asset Management Limited PLC
MBO and subsequent take-private of AIM listed Premier Asset Management Limited PLC
Seera Investment Bank
Secondary buy-out of BWA Water Additives from Close Brothers Private Equity Limited. Voted deal of the year by the FT’s ‘The Banker’
Smiths Flour Mills
Advising Longmynd Industrial on the MBI of Smiths Flour Mills from Vision Capital
Uberior (PE business of Bank of Scotland)
JVs with Warner Estate Holdings Plc to fund acquisitions involving senior and mezzanine debt and equity in excess of £540 million
Welsh Power Group
£125m MBO of Welsh Power Group (formerly Carron Energy) principally financed by Deutsche Bank
The Cloud Networks Limited
Advising the Cloud on several rounds of expansion capital funding including mezzanine finance from EVP and Noble
Be prepared!
Educate yourself upfront
Negotiate a detailed term sheet: don’t let the PE house hide behind terms like “definitive agreements to contain the usual investor protections”
Get proper professional advice
Choose the right financial backer
Don’t just go for fattest wallet
–value added expertise is key
–investor who understands your industry and won’t panic at the first deviation from the budget
–you must have a rapport with the investor’s representative/director
Shared expectations on exit timetable
The right PE house is more likely to secure debt financing element
Will the investor syndicate its position – i.e. who are you dealing with tomorrow?
Some key areas to consider
Good leaver/bad leaver
–Conflict: PE house’s position may only become profitable after a number of years but you may be rolling sale proceeds/equity into Newco
–Consider applying bad leaver provisions only to growth shares
–Consider tapering bad leaver provisions
What level of control are you prepared to concede to the investor?
–Some investors are very hands on
–Long list of investor consents?
–Operational v. strategic matters
5. More key areas to consider (contd)
“Step-in” rights
–Limit to insolvency style events?
–Extend to failure to meet budgets?
–Can the PE firm sack management unilaterally for underperformance?
Exit
–Can they force an early sale which makes it hard to achieve ratchet targets?
–Are the veto rights of the PE house on exit by way of IPO realistic (e.g. minimum valuation, ability to place all its shares on IPO)
Ratchets
–Don’t accept downward ratchets
–Upward ratchets are only valuable if realistic
Risks
Inevitably we hear more about the deals that succeed than those that fail!
At the very least the investor will want warranties from management that the forecasts are reasonable
–be realistic therefore
–typical liability cap of 2/3 x salary under these warranties
If you own equity in the company already you will be required to give warranties in your capacity as a seller up to 100% of your consideration
Complex process which distracts management from running the business
Can you afford to finance your equity or afford to lose your equity?
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