Pros and cons of a BIMBO?

There are many potential structures for somebody who wants to sell the business. 

Many people are familiar with a sale to trade, or to a management team but one potential structure for a share transfer is the so-called BIMBO – a Buy In–Management Buy-Out.

This combines the advantages of a traditional management buy-out with an experienced management team who know about the business, and certainty for the stakeholders, with the advantages of a traditional management buy-in offering new ideas, and often, external financing.

Tom Haywood, associate in the Company Commercial team at Wake Smith Solicitors looks at the pros and cons of a BIMBO.

This article covers:

• What is a Management Buy Out (MBO)?
• What is a Management Buy In (MBI)?
• How does a buy-in management buy-out (BIMBO) work and its advantages?
• Risks of a BIMBO
• How we can help

What is a Management Buy Out (MBO)?

It is common for a business to be sold to its management team. They are usually the people who know most about the business, its strengths and its opportunities.

On the other hand, the management team might lack experience in owning (as opposed to running) the business, and can in some circumstances struggle to obtain sufficient funding. 

What is a Management Buy In (MBI)?

Sometimes a business is sold to a third party, who intends on running the business themselves and becomes the new management team. 

Whilst those buyers may have access to funding, they will normally not know much about the target business and so the acquisition process can be lengthy, requiring extensive due diligence and warranties.

How does a buy-in management buy-out work and its advantages?

The structure aims to combine the best of both worlds. The business is acquired by a combination of the existing management team and external investors. 

Usually the existing management team requires some kind of additional support, whether that be expertise or financing which is provided by the buy-in team. The buy in team can therefore range from individuals to a private equity investor. 

The parties will need to enter into a shareholders’ agreement (or similar) dealing with how the business will be managed in the future.

For a seller, a BIMBO has many advantages often associated with a traditional management buyout.

The due diligence is often less onerous than a sale solely to trade and there is usually an existing relationship with the buyers. This can make the sale process smoother.

Risks of a BIMBO

The success of the transaction is dependent on the relationships between the new owners.

It is common for this type of transaction to be funded by the external investors, which can mean that their interests – to drive the business with a view to an exit – may differ from those individuals who want to operate the business for a lengthy period of time. 

It is important to ensure everybody is in agreement at the very beginning. The venture is unlikely to be successful if some of the parties are looking to exit in the short term and others want to trade long term.

If the business begins to struggle, then the relationship between the new buyers can start to break down; the shareholders’ agreement can and should cover this risk.

How we can help

There will inevitably be a great deal of negotiation between all of the parties on the key commercial and legal terms and we can help you with these, as well as assisting you with the due diligence process.

Although the shareholders’ agreement is usually the main document, this is commonly supplemented by bespoke articles of association, employment contracts, and ancillary matters such as board minutes, shareholder resolutions, allotments of shares and filings at Companies House.

Every deal is different, but some of the issues we see are:

• An investor is likely to insist on certain rights, such as the right to appoint members of the board, and to be able to veto certain decisions. A balance must be struck between the investor’s ability to protect their investment, and the management team’s ability to run the business.
  
  
• The shareholders’ agreement will usually contain provisions dealing with an exiting shareholders’ shares, and under what circumstances they can be retained – or, if sold, at what price. A shareholder retiring due to ill health will often be treated differently to a shareholder working for a competitor. The first might be entitled to sell his shares at full value whereas the second will invariably be required to transfer his shares for nothing.
  
  
• The management team inevitably has access to very important documentation, and it is common for them to enter into restrictions in both the shareholders’ agreement and their employment contracts preventing them from – for example – poaching staff or working for a direct competitor. These need to be carefully considered and drafted as if they are wider than necessary they are not enforceable.
  
  

Your next move?

For further information please contact Tom Haywood at Wake Smith Solicitors on 0114 224 2033 or email [email protected] 

Find out more about our Company Commercial services

Published 19/01/2024