Basic structure of the MBO

An MBO takes place when the management team, which typically includes directors and first tier management, enters into an agreement to purchase an existing business. The usual form of an MBO is either:

1. •

   the acquisition of the shares in the target company (Target) by a company newly incorporated by the management team to make the acquisition (Newco)

2. •

   the acquisition of the trade and assets of Target by Newco

3. •

   the transfer of Target’s trade to a subsidiary of Target (Target Subco) followed by Newco’s acquisition of Target Subco (known as a hive-down)

Other structuring considerations ― funding for the transaction

The management team will invest funds into the new structure, which will usually consist of a combination of share capital and loan financing (eg loan notes).

The MBO will often be financed out of current and future reserves of Target and there are two possible ways of doing this:

1. •

   the Target could pay a dividend to Newco and Newco uses the funds to repay the debt to