3 questions to smart minds
Photo: Dr. Benedikt Hohaus

The biggest mistakes in management investments

For this 3 questions to Dr. Benedikt Hohaus

P+P Pöllath + Partners
Photo: Dr. Bene­dikt Hohaus
21. Novem­ber 2017

Manage­ment share­hol­dings are stan­dard in manage­ment buyout (MBO)/leveraged buyout (LBO) tran­sac­tions carried out by finan­cial inves­tors. The goal of finan­cial inves­tors is to homo­ge­nize inte­rests with manage­ment. Employees are to become entre­pre­neurs. You can read the detailed author contri­bu­tion by Dr. Bene­dikt Hohaus, Part­ner at P+P Pöllath + Part­ners , and Prof. Dr. Alex­an­der Götz Part­ner at Blätt­chen & Part­ner GmbH on this highly topi­cal subject in the new FYB 2018 issue. It will be published at the end of November.

For this 3 ques­ti­ons to Attor­ney at law, tax law specia­list and part­ner at P+P Pöllath + Part­ners, Munich

1. What mista­kes are often made in prac­tice with manage­ment investments?

In prac­tice, mista­kes are made again and again, both in the process and in the concrete struc­tu­ring, which can lead to the actually posi­tive effect of manage­ment parti­ci­pa­tion not coming to frui­tion or even turning into a nega­tive. This concerns, among other things, tax issues that must be hand­led carefully in order to avoid tax disadvantages.

Ulti­m­ately, manage­ment equity invest­ments are capi­tal invest­ments with a risk of loss and are not compen­sa­tion. Howe­ver, problems may also arise from IFRS 2, which governs the accoun­ting treat­ment of share-based payments.

A stumb­ling block in fast-paced tran­sac­tions can also be the comple­xity of the contrac­tual docu­men­ta­tion submit­ted on manage­ment share­hol­dings. In times when even the term sheet for a manage­ment invest­ment is some­ti­mes 20 pages long, a private equity inves­tor can gain advan­ta­ges by using short, concise contrac­tual docu­ments writ­ten in clearly under­stan­da­ble language. Mista­kes can be easily avoided if certain legal, tax and econo­mic anchor points are conside­red from the outset.

2. What is the posi­tion of manage­ment in a sales process?

In M&A proces­ses with poten­tial private equity inves­tors as buyers, manage­ment has an important role to play. Private equity inves­tors need manage­ment to run the company being acqui­red. The seller needs the manage­ment to faci­li­tate a struc­tu­red sales process and to present the company for sale as well and compre­hen­si­vely as possi­ble. In this respect, manage­ment is also often refer­red to as the third party in the sales process. M&A proces­ses have become incre­asingly fast and complex. Today, manage­ment parti­ci­pa­tion should regu­larly be agreed before the tran­sac­tion is signed (at least on the basis of the term sheet).

Manage­ment needs support with the issues that affect them perso­nally, such as guaran­tee decla­ra­ti­ons, direc­tors’ service agree­ments and manage­ment parti­ci­pa­tion. For this reason, manage­ment should be assis­ted from the outset by consul­tants who are fami­liar with the subject matter.

3. From what amount is a manage­ment invest­ment worthwhile?

Due to a lack of expe­ri­ence, company direc­tors tend to include a broad range of people in the parti­ci­pa­tion program. This is where the finan­cial inves­tor should defi­ni­tely contri­bute his expe­ri­ence. It would be better to involve fewer people, but to involve them properly. Invest­ment amounts of less than EUR 30,000 to EUR 50,000 do not make sense, as the expense is dispro­por­tio­nate to the return. Excep­ti­ons prove the rule, for exam­ple in the case of parti­ci­pants from emer­ging markets.

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