How to finance a management buyout

by whatsmind

A management buyout (MBO) involves a company’s management team pooling resources to acquire all or part of the company they manage.  

Management buyouts are win-win deals. The company gets assurances of its future success, whereas the management team gets the opportunity to benefit more from the company’s future profits. 

However, an MBO can be a complicated process and many MBOs fail to create additional value. Something that always helps the success of a business venture is having a robust financial plan in place.  

So, what are the different ways to finance an MBO? 

Management equity 

Simply put, this means that the management team pays out of their own pocket. There are a variety of ways that this can be done, from the re-mortgaging of property or selling of assets such as stock holdings. 

Regardless of the means that each member of the team uses, it’s important that each individual contributes. This will demonstrate to other lenders and investors that the team as a whole is committed to the growth of the business. 

External sources of funding 

It’s unlikely that the management team will have enough resources to buy the company on their own. For this reason, they will need to secure funding. What different options are available? 

  • Asset finance  

Asset finance is funding from a bank that lets the company leverage its assets, which usually include property, shares, or debtors. This option is more feasible for asset-rich companies. 

  • Bank loans 

Banks consider giving a cash-flow loan to a team conducting an MBO for a specified term, usually 3-5 years. Since this is a longer-term option, the team needs to be sure they’re in it for the long haul. 

  • Private equity 

As well as banks, management teams can turn to external investors. Private equity funds focus on backing the right teams and businesses, so as to turn a profit.  

If the management team is strong, as well as the business, profits, and growth prospects, then PE funding is realistic.  

  • Vendor loan notes  

Often, the sellers smooth over the transition by leaving some of their money in the company as loan notes to be repaid over time. This can help complete the buyout but shouldn’t be counted on as the sole funding strategy. 

An MBO is a huge undertaking and shouldn’t be treated lightly. Make sure that you have your financial plan is squared away in minute detail before beginning. 

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