The Management Package: The Cornerstone of LBO Transactions

The Management Package, which is based on sharing value creation between the investment fund and the executive shareholders, encapsulates the balance in fund-manager relationships and aligns their respective interests.

The two key elements involved in putting together the Management Package revolve around 1) the business plan, which is essential to the financial viability of the transaction, and 2) the negotiation of an agreement between management and the fund prior to the completion of the transaction.

For executives embarking on an LBO, the following appears to be essential:

Management is faced, sometimes for the first time, with private equity experts (funds, banks, lawyers) handling all the financial, legal, and tax aspects of the transaction. This requires engaging an external advisor who acts as an “interpreter” of the various areas of expertise and practices, highlights the interests and strengths at play, and helps streamline communications with the acquiring funds by acting as a buffer in discussions when necessary.

This advisory firm is a technical expert that helps secure a balanced financial and legal agreement with the fund. It also advises management on industry benchmarks and current practices (or lack thereof) regarding management packages (required investment, capital gains recapture, structuring, and tax implications).

The business plan projects the company’s future results, typically over a 5-year period, and enables acquiring funds to determine their acquisition price and the breakdown of that price between equity (their investment) and debt. Prepared by management, it constitutes a genuine “financial contract ” between the acquiring fund and management. Its fulfillment justifies sharing, for the benefit of management, the shareholder value created by the achievement of operational performance objectives.

The transaction price will take into account the fund’s target IRR requirement for its investment and the group’s potential debt level, which is linked to the company’s ability to generate cash flow sufficient to service its debt and reduce the group’s debt (deleveraging). As the guardian of the company’s best interests, management must, in particular, ensure a balance among these three key factors: “Price,” “Debt,” and “Target IRR.”

For their part, acquiring funds require management to make a personal, at-risk investment in the transaction, which helps lend credibility to the business plan presented to them.

Negotiations for the management package begin early in the sale process, typically during the second round of bidding, when a price range begins to emerge among a limited number of potential buyers.

" Management presentations " allow buyers to complete their assessment of management’s ability to achieve its business plan. During these presentations, management will naturally engage in discussions with potential buyers regarding the legal and financial terms under which it will be required to invest alongside the investment fund.

The common goal is to formalize these terms in a preliminary agreement known as a “management term sheet , ” which is typically signed at the same time as the exclusivity agreement between the buyer and the seller.

A true reflection of the relationship between managers and funds, defining the terms of the financial agreement based on the implementation of a business plan, the management term sheet will set forth the following fundamental provisions:

The Management Package is therefore key to an LBO because it allows management to align its interests with those of its financial shareholder in every respect.

Financing Card- Claire Revol-Renié