Published

February 7, 2024

Management buyouts usually require significant funding, and there are several finance options available that can help you complete a successful MBO.

Have you ever wondered how to finance a management buyout (MBO)? If you’re a management team looking to buy the business you currently work for, an MBO can be an appealing option to you and the existing owner who wants to exit the business. Buying an established business, rather than creating a new one, will bring many benefits. Plus, knowing the current owner well should make the deal a lot easier.

What is a management buyout?

An MBO essentially involves a business’ management team pooling resources to buy part or all of the company it currently manages. Management buyouts can occur in any industry and businesses of all sizes. There are several motivations for both the buyer and seller to complete an MBO. It can be a complex process with numerous parties involved and usually requires a substantial sum of money. Often these buyout structures consist of a mixture of debt and equity finance.

Funding a management buyout

In most cases, the management team will not have sufficient funds to purchase the business and therefore needs to secure finance. Sources of management buyout financing options include:

Management Equity

The management team always makes a financial contribution towards the transaction, whether from the sale of assets, personal savings or a re-mortgaged property. Although each team member must take their circumstances and financial position into account, the investment must be meaningful to each individual to show lenders they’re committed to growing the earnings and profit of the business they wish to purchase.

Bank Funding

Some banks will be happy to support an MBO by providing a secured or unsecured loan, which the management team needs to repay over an agreed period. Banks charge interest upon the sum actually advanced and sometimes offer a low, fixed interest rate. The management team’s chances of getting a bank loan will depend on their personal finances and the current business financials and projections for growth.

Specialist Lenders

Management buyout loans can be hard to secure from banks, but the good news is that some specialist lenders are willing to provide debt finance to management teams. Smaller businesses often use this financing route when they cannot access the capital they need through traditional sources. However, a loan from an alternative lender is considered high risk and will likely have a higher interest rate.

Seller Financing

While sellers prefer to get paid in full, they sometimes offer finance to the management team, known as a seller financed management buyout, which then defers a proportion of the purchase price. When a seller does this, it reduces the amount of upfront capital required from the buyers. It also shows finance providers that the seller believes the management team is committed to the future success of the business.

Private Equity (PE)

Funding an MBO using private equity is generally only realistic if the business expects to grow significantly within a short time frame and the anticipated exit is fast. Private equity firms provide finance in return for an equity stake in the business. And generally, they’re interested in a short-term return on their investment, usually within five years.

Mezzanine Finance

Mezzanine finance refers to a hybrid form of debt and equity financing. Although a less common way to fund MBOs, mezzanine finance can bridge the gap between the debt the business can support, the equity, and the purchase price. Mezzanine finance ranks behind senior debt in priority of repayment. This means it offers higher returns for lenders and often carries equity warrants.

How does the management buyout process work?

The management buyout process typically takes around six months, and the key steps of an MBO include:

  1. Get an independent business valuation to determine how much the business is worth.
  2. The management team prepares a business plan and evaluates risk factors and opportunities for growth.
  3. Once the planning stage is complete, the management team makes an offer to gauge the owner’s interest and show them that they’re the best buyers for the business.
  4. When a sale price has been agreed upon, the management team members assess their finance options and which finance partners are willing to help them.
  5. The management team selects the most suitable finance partners and finance is raised.
  6. Next, the management team engages specialists to carry out due diligence tasks.
  7. The final step is closing the deal with the seller and making the management team the new owners of the business.

Advantages of a management buyout structure

Management buyout financing offers advantages to all parties involved, including the management team you’re part of and the owner wanting to sell the business. 

The advantages of an MBO include:

  • Managers have an existing knowledge of the company and know what can be improved, giving them a higher chance of success.
  • An MBO allows for a quicker and smoother transition of ownership.
  • It should be easier to agree on a value for the business.
  • The management buyout route gives employees, clients and suppliers reassurance that it’s business as usual.
  • Confidentiality surrounding the sale and transfer of ownership is easy to maintain.
  • Protect the reputation of the business that the managers helped to build.
  • A management buyout is a good option for businesses that may struggle to attract a trade buyer.
  • An MBO enables managers to make their mark on the business.

Do you want to finance a management buyout?

The Provide Finance platform helps you find the right solution to finance an MBO. Our intuitive matching software increases your exposure to relevant lenders and identifies the most suitable finance providers. This saves you time and hassle in your search. 

In addition, our unique platform guarantees you get the best deal. From sourcing to completion, you can manage the entire loan process directly on Provide Finance. You can apply for finance by signing up for free today. If you would like further information on how the Provide Finance platform can help you assess your options of financing a management buyout, give us a call on 0800 7723 180. Alternatively, use our online chat service.

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