What is a management buyout and how do you finance one?
A management buyout (MBO) is when a company’s existing management team purchases all or part of the business. This is usually done with the help of external financing. This allows the management team to take full control and ownership of the business, allowing the current owners to exit, either to pursue new ventures or retire.
The MBO process can be a complex and lengthy, often taking up to 6 months to complete. It usually requires the involvement of lawyers, accountants, funders, lenders and sometimes equity investors.
When should you consider a management buyout?
Financial distress – If the business is facing struggles such as liquidation, an MBO could be a suitable alternative to selling or merging with a third-party.
Exit Strategy – An MBO is usually a safer option compared with finding a trade buyer. This is because it avoids disclosing sensitive business information.
Employee Ownership Trusts (EOT) – Another way an MBO can be structured is through an EOT, where employees are able to acquire a majority stake in the business. This form of finance is similar to a traditional MBO structure.
Reasons for undergoing a management buyout?
There are several reasons why a business may consider a MBO, including:
Ownership transaction – Perhaps the most common reason, a company may engage in a management buyout as the current owners want to exit the business.
Subsidiary spin-off – A parent company wishes to dismantle itself from a business division or subsidiary.
Financial recovery – The company is under financial stress but holds potential.
Growth opportunities – The management team believes they can achieve greater success under new business ownership.
What are the benefits of a management buyout?
There are several positive factors involved in undertaking an MBO. the most obvious being a smoother transition from one owner to the next. The management team is already familiar with the business, ensuring minimal disruption for customers, partners, suppliers and employees. The management buyout team is also accustomed to handling sensitive and proprietary information, reducing the risk of exposure that often comes with a trade sale.
What is the difference between a management buyout and a leveraged buyout?
An LBO and a MBO are very similar as they both involve the existing management team within a business buying all or part of the company from its current owners However, a leveraged buyout usually involves the selling of the company’s existing assets, or pledging them as capital to raise all or some of the working-capital required for the purchase.
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, MBO 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, and traditional tools like small business loans don’t quite cut it. 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/ refinancing
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
As a multifaceted business finance provider with the best specialists available in their respective fields, we’ll find the most suitable business finance solutions for your management buyout. Our expert Structured Finance Solutions division can work with you to structure transactions, value businesses and even find buyers.
Our unrivalled experience in business finance ensures that we secure the most comprehensive funding solutions available on the market. We’ll liaise with funders to ensure the best possible terms are secured, leaving you to focus on running your business.
If you’re considering a MBO and would like to speak to us about tailored funding solutions, get in touch today.