finance options - Management Buyout

Management buyout financing

How to finance a management buyout 

What is a management buyout?

A management buyout (MBO) is a transaction involving the existing management team of a company acquiring a significant ownership stake, or full ownership of the company from its current owners. These parties could be the company's founders, shareholders, or another parent company. Typically, this is done with the goal of making the company private.

How does a management buyout work?

A management buyout is when a company's existing management team purchases the business from its current owners. Here's a simplified overview of how it works:

  1. Management team formation: The current managers come together to buy the company.
  2. Proposal and negotiation: They propose terms to the current owners, including the purchase price.
  3. Due diligence: They assess the company's health and risks.
  4. Financing: They secure management buyout financing from sources like their own money, investors, or a business loan.
  5. Purchase agreement: Finalise the deal's specifics in a legal agreement.
  6. Regulatory approvals: Obtain any required approvals.
  7. Closing: The deal is completed, and ownership transfers.
  8. Post-closing: The management team takes over and implements their plans.

Each management buyout will be unique, so the details can vary based on the specific parties and circumstances involved.


Pros and cons of a management buyout

Pros of a management buyout

  • Management buyouts often lead to a smooth transition of ownership, which is a benefit for any existing employees, or customers, and suppliers. As the existing management is already familiar with the company, it helps to reduce the risk of disruption.
  • A management buyout can lead to increased dedication to achieving the company goals, as when the management team becomes the owner, their interests are closely aligned with the success of the business.
  • The management team will usually possess in-depth knowledge of the company's operations, leading to more informed and efficient decision-making. 
  • New ownership can bring fresh perspectives and innovative ideas to the business. 

Cons of a management buyout

  • One obstacle is the ability to secure the necessary finance.
  • Balancing the interests of the management team, external investors (if any), and the sellers could be a challenge. These differing expectations and objectives may lead to conflicts during negotiations and post-acquisition.
  • If the management buyout involves taking on a substantial amount of debt to finance the purchase, it can increase financial risk for the business.
  • Management team members often invest a significant portion of their wealth into the business. So, if the business encounters financial difficulties, it can impact the personal finances of the management team.

What are the different types of management buyout finance?

Financing a management buyout can be a complex process, with several different options available to secure the funds for the acquisition. The choice of management buyout financing method will depend on various factors, including the financial health of the business, the management team's resources, and the preferences of the current owners. 

Here are some common ways to finance a management buyout:

Equity investment

  • Management team's equity

The management team can use their personal savings or investments to contribute equity towards the purchase. This demonstrates their commitment to the transaction and aligns their interests with the success of the business.

  • External investors

In some cases, external investors such as venture capitalists, private equity firms, or angel investors may be willing to provide equity capital in exchange for ownership stakes in the business. This can help reduce the financial burden on the management team.


Debt Financing

  • Business loans 

Getting a business loan is a common way to finance a management buyout. The type of business loan can vary depending on the individual case needs, for example you could opt for a long term loan, or short term loan. Choosing a business loan can offer flexibility in terms of structuring the repayment terms and will help to bridge the gap between the management team's equity contributions and the total acquisition cost. Management buyout business loans can help the acquisition to move forward smoothly, while also preserving cash flow.

  • Seller financing

Seller financing involves the current owners of the business providing financing to the management team in the form of deferred payments, seller notes, or earn-out arrangements. This can be an advantage when external finance options are limited.

  • Mezzanine financing

Mezzanine financing combines elements of debt and equity. Mezzanine financing typically takes the form of subordinated debt, which means it ranks lower in priority for repayment than traditional senior debt. This means that mezzanine finance generally carries higher risk for lenders, so there are often higher interest rates involved. 

  • Cash flow and profits

In some cases, the management buyout can be funded using the future cash flow and profits of the business. This approach requires careful financial planning and may involve a staged buyout over time as the management team generates the necessary funds internally.

  • Asset finance

A common way to source funding for a business purchase is through asset finance, Unlike a traditional business loan, asset finance allows you to use existing assets such as machinery, or commercial property, as security against your borrowing. The security provided by these assets can help lenders to come to a quick decision, giving you the peace of mind that you'll have the funds needed to complete a successful purchase. Many asset based lenders are happy to accept a mixture of security streams giving you the freedom to tailor your new financial arrangement to your individual and business circumstances. For example, you may choose to secure half of the funding against a commercial property and the other half against plant machinery or other industry-specific equipment and tools. 

How to apply for management buyout finance? 

Capitalise gives you the freedom to browse financial products from more than 100 trusted lenders. After completing your profile online, our finance platform will help to pair your business with lenders who best match your requirements. 
You'll be able to apply to multiple lenders simultaneously from one profile, helping you to save time and money that would typically have been spent wading through each lender's website and application form.
You can sign up to Capitalise for Business for free and connect with a dedicated funding specialist to help you find the right finance. 

management buyout frequently asked questions

The risks involved with management buyout financing can include:

  • Debt repayment obligations
  • Interest costs 
  • Challenge of meeting financial projections
  • Potential conflicts of interest within the management team. 

If you’re considering management buyout finance, it's essential to carefully assess and manage these risks.

Due diligence is a critical step in management buyout financing. It involves an examination of the company's financial, operational and legal aspects. Lenders and investors will often require comprehensive due diligence before they can provide finance. 

A management buyout calculator is a tool that helps estimate the purchase price and financing needed for a management buyout. It can assist in the initial assessment of the feasibility of the transaction.

Management buyouts are most suitable for businesses where the management team has a strong desire and capability to take ownership and where the transaction aligns with the company's long-term goals and stability.

After the management buyout, the management team takes control of the business's operations. They often implement their strategic plans and work to achieve the company's growth and profitability targets.

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