What is a management buyout and how do I finance one?

A management buyout or MBO is a process of purchasing all or part of a company by its existing management team, usually with the help of external financing. The management team will take full control and ownership of the business, allowing the owners to either move on to new ventures or retire, leaving the company in the safe hands of a business-knowledgeable management team. 

An MBO can be used if the business is in financial stress, like liquidation, it can be used as an alternative or for selling, merging, or transferring the business to a third party, and it’s often seen as a safer bet in comparison to finding a trade buyer and possibly disclosing sensitive information on the business. 

An MBO can be a complex and lengthy process, taking up to 6 months to complete and can require the input of lawyers, analysts, and accountants, as well as the support of funders, lenders and possibly equity investors. 

Employee Ownership Trusts (EOT) is another method  of structuring management buyouts. An EOT is a mechanism  that allows the employees of a company to acquire the majority stake of the business they work in. Finance of this form of management buyout is treated exactly the same as traditional management buyout structures. 

Possible reasons you might be thinking about a management buyout? 

The most common reasons businesses choose a management buyout are the old company wishes to exit the business, a parent company wants to dismantle itself from a subsidiary or business division, the company finds itself in financial stress but still has some potential and also, the management team perceives greater business opportunity under new ownership. 

There are several positive factors involved in undertaking an MBO, the most obvious being a smoother transition from one owner to the next, as the new owners are already closely associated with the company. This can be a positive for customers, partners, vendors, and employees of the business as the MBO should indicate minimal disruption and a continuation of business as usual. The management buyout team will also be practised in handling sensitive and proprietary information within the business, something which can be a negative aspect of entering into a trade sale, as outsides are able to see the inner workings of the company, making them vulnerable to copycat operators. 

Leveraged buyout and management buyout, what’s the difference and what do you need to know? 

These 2 processes are very similar as in they both involve the existing management team within a business buying all or part of the business from the current owners, however, a leveraged buyout involves the selling of the company’s existing assets or pledging them as capital to raise some or all of the purchase cash.  

This is also known as asset finance, where the buyout team leverages the value of assets such as machinery or property to borrow money to buy the business, enabling them with the continued use of the assets but they will make repayments and pay interest, on the assets until the loan is repaid in full. This leads us to how you can finance an MBO and the different forms of structured finance available. 

How structured finance can help with a management buyout. 

It’s important to look at the different funding options available for a management buyout, as there are serious risks that need to be mitigated. It may be expected that the buyer makes a financial contribution to the purchase from their own pocket, however, it is likely that a third-party funder will contribute the majority of the finance for the MBO. 

Also referred to as Acquisition Finance, Management Buyout Finance or Asset Based Lending (ABL),   Structured Finance is a type of financial lending that works to finance Corporate Finance transactions. Corporate Finance transactions simply refers to the sale or purchase of a business. . A management buyout is a complex financial arrangement, meaning that traditional tools like small loans would be unsuitable for business needs, this is where different types of structured finance should be considered. Let’s take a closer look at the structured finance options available for management buyout below: 

Asset finance/ refinance 

If the business owns substantial assets, these can be used as collateral for borrowing, allowing you to release cash from property, business assets or stocks to fund your purchase. Also known as a leveraged buyout (mentioned above) as the company’s assets are leveraged to buy out the old owner of the business. The business will usually retain full access to the assets during the term of the loan. 

Term loans 

This is a funding option whereby alternative lenders can provide a cash flow term loan for up to 5 years to help fund your management buyout. You will receive a sum of money which is then paid back in instalments with interest. 

Invoice Finance 

Invoice finance can be used to raise money in the event of a management buyout. Money can be raised against the businesses debtor book, simply the invoices the business hasn’t yet been paid on.  It’]s often used in structured finance transactions, normally as a component part of an ABL deal.  

Mezzanine Finance 

This enables you to bridge the gap between the funds you’ve raised and the company’s purchase price. A mezzanine loan is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid. 

Asset Based Lending 

This is a mechanism to advance money against a combination of a businesses assets, which can include outstanding invoices (debtors), plant/ machinery, commercial vehicles and commercial property. 

How PMD can help with funding for your management buyout

Here at PMD, we are a multifaceted business finance provider, with the best specialists available in their respective fields to help you find the best business finance solutions for your management buyout. Our expert Structured Finance Solutions division can provide advice on how best to structure transactions, value businesses and even find buyers. 

We have unrivalled experience in business finance, providing you with the confidence that PMD will secure the most comprehensive funding solutions available on the market, whatever your needs. It’s our job to liaise with funders to ensure the best possible terms are secured, leaving you to focus on running your business. 

If you’re considering a management buyout and would like to speak to us about funding solutions tailored specifically to you and your business, get in touch today to see how PMD can help.

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