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Buyouts, buy-ins and beyond: a guide to business acquisitions

Sep 5, 2022 | Uncategorised

Buying or selling a business is complicated – and as with other areas of commercial law, you may find yourself lost in a dark wood of jargon without a map.

Everyone knows what “buying” and “selling” mean, but these handy, concrete concepts turn to dust in your hands as you enter a world of MBOs, MBIs, LIMBOs and RAMBOs (no, we’re not making these up).

If you’re interested in the nitty-gritty of buying or selling your business then learning the language of acquisitions is a step in the right direction. We’re going to break down the main types of business acquisitions so you can approach the subject with the right lingo at your command.

Acquisitions

OK, so this one’s easy. An acquisition is a purchase. Just as a library or museum “acquires” new items, so a bigger business can acquire a smaller one.

Unlike an everyday purchase, where you have to pay the full price either on the day or in instalments, an acquisition can happen if you buy more than 50% of the company’s shares. This is called a “controlling stake”.

Acquisitions usually happen because both firms agree it will be mutually beneficial and lead to growth. The bigger firm expands and the smaller firm profits from this expansion.

Once purchased, the smaller company will either be subsumed into the larger firm or operate as a subsidiary.

Takeovers

“Takeover” and “acquisition” are sometimes used interchangeably, but the difference is that a takeover is rarely seen as mutually beneficial. The smaller firm is a “target” – and this quasi-militaristic language tells us that the target firm doesn’t welcome the acquisition. We’re now in a world of big fish eating little fish.

Sometimes the bigger firm wants to incorporate the talent of the target company into its fold. In other cases, it’s a means of eliminating the competition in an area where the bigger firm wants to grow.

Mergers

Mergers and acquisitions go together like salt and pepper – but the difference is that people often confuse the two. This confusion arises because both terms refer to the joining together of two companies.

The key difference is that an acquisition is a purchase that ends in the acquiring firm owning the smaller one. A merger, as the name suggests, is when two businesses join forces and become a new, larger enterprise.

Let’s say two businesses feel they have the potential to expand, but not if they go it alone. By merging, they share their locations, marketing, staff, and so on. They’re now a single entity with greater reach and the potential to increase its market share.

Mergers can take place on a grand scale – high-profile instances include Kraft and Heinz, and Exxon and Mobil. But SMEs, as well as giants. can merge in pursuit of mutually beneficial growth.

MBOs and MBIs

MBOs and MBIs are types of business acquisitions where management gains majority ownership from previous shareholders.

First, let’s look at an MBO, which stands for “management buy-out”. This is where the acquisition comes from within the company. The existing management team buys out the company shareholders.

This is a way for employees to transition into owners, and in doing so reap the rewards of ownership.

There are a couple of commonly cited advantages to MBOs. One is that the management team has inside knowledge of the company they’re acquiring, which puts them in a good position from which to implement changes.

The other much-mentioned advantage is that an MBO doesn’t rock the boat in terms of personnel changes. This sense of continuity can be reassuring to partners and clients.

The downside is that MBOs are highly expensive. Typically, the team will pool personal capital and finance from banks and private equity firms.

Added to this, the existing relationships between buyers and sellers can lead to awkwardness and conflict in negotiations. Professional legal advice can help relieve some of this strain.

When O becomes I

As we said, an MBI is similar to an MBO in that both involve a management team gaining majority ownership.

The difference is that whereas an MBO is a management buy-out, an MBI is a “management buy-in”. The acquiring management team doesn’t already exist within the firm being acquired but comes from outside.

In this scenario, an external management team purchases a controlling ownership stake and replaces the existing management team. This is often preceded by a bidding war, as different teams eye up the potential of the firm. As with MBOs, it’s an expensive business that requires backing from banks and private equity investors.

Because the buyers come from outside the company, an MBI can be difficult to negotiate. The team may be viewed sceptically by the current owners, and the process of negotiations has the potential to create stress and uncertainty for the workforce. This is an area where solid legal representation can help.

MBIs typically require more “due diligence” than an MBO. Due diligence is a legal term that means “reasonable steps you need to take to avoid breaking the law”. In other words, the buyers need to go through all the information relevant to the purchased company with a fine-tooth comb. These background checks are essential, not least because they might throw open a closet door and find a skeleton there. It also means that the external team can get their heads around an unfamiliar business before taking it under their wing.

Business purchases and sales of all stripes are as complex as they are important. The impact they can have on your company’s growth means that strategic planning is essential. This is something experienced lawyers can provide along with expert negotiating skills. They can walk you through the legal complexities, draw up documents, liaise with third parties, and help you to seal the deal.

At Milners, we offer straight-talking guidance with a proven track record of getting results. If you need corporate legal advice, don’t hesitate to get in touch regarding a free consultation.

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