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Management Buyouts

What is the difference between MBO and LBO?

An MBO (Management Buyout) is specifically when the management team buys the company. An LBO (Leveraged Buyout) refers to how it's funded (using mostly debt). Most MBOs are also LBOs.

Can the seller finance the deal?

Yes, "Vendor Financing" is common, where the seller agrees to be paid over time from the company's future profits, often to bridge a valuation gap.

What if the management fails to raise funds?

Deal terms usually include a "financing contingency" clause, allowing the management to walk away without penalty if they cannot secure the necessary loans.

Do we need separate lawyers?

Absolutely. The sellers and the management team must have separate legal representation to avoid conflict of interest and ensure fair terms for both sides.

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Management Buyout (MBO): Transferring Business to Experienced Hands

A Management Buyout (MBO) is a type of corporate transaction where the existing management team of a company purchases the business from the current owners. This method is particularly popular because the management knows the company's potential best, reducing transition risks and ensuring business continuity. For the owner, it is a reliable exit route, and for managers, it is a chance to become entrepreneurs. However, an MBO involves specific legal and financial complexities: conflicts of interest, securing funding (often in the form of debt), and establishing a new corporate structure. Transparency and correct legal execution are critical to prevent future disputes over price and terms.

Legal.ge offers professional assistance in planning and executing MBO transactions. Lawyers on our platform will protect the interests of both the seller and the buying management, ensuring funding structuring and transaction security.

What Does MBO Service Cover?

The management buyout process involves several critical stages:

  • Transaction Structuring: Creating a new holding company (NewCo) to acquire the target company and defining the shareholding structure among managers.
  • Legal Assurance of Financing: MBOs are often financed by debt (Leveraged Buyout). The lawyer prepares loan and security agreements with banks or private investors.
  • Due Diligence for Management: Even though managers know the company, formal legal verification is necessary to confirm the cleanliness of assets.
  • Conflict of Interest Management: Directors buying the company are in a dual position. Strict procedures must be followed to avoid breaching fiduciary duties.
  • Shareholders' Agreement (SHA): Setting rules among new owners (former managers) — decision-making, share transfer, and "Good Leaver / Bad Leaver" provisions.

Common Scenarios When an MBO is Implemented

An MBO is an ideal solution in the following situations:

  • Owner Retirement: When a founder has no heir wishing to manage the business and prefers to pass the company to a loyal team.
  • Divestiture of Non-Core Assets: When a large corporation sells a subsidiary that does not fit its core strategy.
  • Crisis Management: When an owner wants to avoid bankruptcy and management takes the risk to save the company.

Georgian Legal Framework

In MBO transactions, adhering to the Law on Entrepreneurs is paramount. Special attention is paid to articles regarding director conflicts of interest. If a director buys the company, they must ensure the transaction is fair and does not use internal company information to the detriment of the seller. The Civil Code is also important regarding loan and guarantee agreements. If the buyout is financed by a bank, company assets are often pledged, requiring corporate approvals (considering Financial Assistance rules).

Service Process Stages

Working with a specialist includes:

  1. Readiness Assessment: Analyzing management's financial capabilities and the company's value.
  2. Letter of Intent (LOI): Presenting a formal offer to the owners.
  3. Securing Funding: Negotiating with banks or funds to raise capital.
  4. Drafting the Agreement: Drafting the Share Purchase Agreement (SPA) and outlining warranties.
  5. Closing the Deal: Payment of funds, transfer of shares, and approval of new management.

Why Legal.ge?

A management buyout is an emotionally and legally complex process where partners become opposing parties at the negotiation table. Legal.ge connects you with experienced lawyers who will help you maintain ethical standards, secure funding, and successfully take over the business. Turn your managerial experience into ownership with the help of Legal.ge.

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