The biggest mistakes in 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.

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.

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.