| 11.Management Buy-Outs
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| Securing Fair Competition |
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| - What safeguards are needed when management buy-out teams, as well as external bidders, are allowed to bid for a business?
| - Departments may wish to encourage the management and/or employees to bid for the business, for example to show potential external bidders that it is worth acquiring and to keep the management and employees well motivated in the period leading to the sale. But management know more about the business than anybody else and their involvement may deter other bidders, to the detriment of the sale.
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| - Departments should therefore consider allowing management/employee bid participation only at a later stage in the bidding process for example where a preferred external bidder has been identified who wishes to involve the management and employees in the bid.
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| - Where management buy-out bids are permitted, departments should take steps to ensure that, so far as possible, external bidders are treated on an equal footing with the management buy-out bid.
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| - In particular, procedures should be established to secure equal access for all bidders to material information about the business to be sold and the sale process.
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| Use of Incentives |
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| - What criteria should be applied to ensure that incentives to encourage bids from the management and/or employees of a business represent good value for money?
| - The case for incentives, such as price preferences or financial assistance with the cost of mounting bids, should be considered carefully. Any incentives offered should be declared to all bidders. Departments should reclaim financial assistance from bidders who are successful.
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| Securing the Best Proceeds |
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| - What can departments do to obtain full value when businesses are bought by management buy-out teams?
| - Management buy-outs and their backers generally intend to sell their shares in the business. In some cases they have done so after a relatively short period, at significant profit, indicating that full value may not have been obtained for the taxpayer on privatisation.
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| - A safeguard against this risk is a fully competitive sale process, backed by an accurate valuation of the business. But departments should also consider the case for provisions allowing them to share in any profits made on resale within a specified period.
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| - Where management buy-outs are contemplated, departments should consider taking measures such as the appointment of non-executive directors and the exclusion of members of any management buy-out teams from the conduct of the sale.
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