Private Equity for Management Buyouts

A Management buyout - or MBO - allows a company’s management team to buy the business they manage.

It can occur when a large corporation wants to sell off a business that is no longer part of its core focus, or when the owner of a private business is ready to retire. 

For the buyers, the managers of the business, it means mean acquiring a business that has already demonstrated its profitability and avoids the costs and uncertainties of setting up a new venture. The transfer of responsibilities between the vendors and management can remain confidential, while any due diligence required by external funders can often be handled with the minimum delays. But it also means a substantial investment will be required. Once a price has been agreed - which can be at a discount on the market value of the business - the buyout team will need to find the necessary funding.

Equity Funding

Equity describes the shares in a business. Equity investors will take a stake in the ownership of the business and are entitled to a proportion of the profits, as well as the capital value. Equity represents an expensive source of capital investment - but despite this, the scale of funding required in the MBO of a large business may mean that private equity may be the only practical solution for many buyouts. 

The majority of PE funds look to invest in established, expanding companies that can generate significant investment returns. However, the risks to these investors can be relatively high. If a business fails, the equity investors will only receive a distribution on winding up after lenders and creditors have been paid. An equity investment in an MBO, therefore, has a higher risk than that of a lender and the return investors demand is typically higher.

Private Equity firms will usually want liquidity - and payback - after 3 to 6 years. Their funding will often include conditions about the profit levels to be achieved and may include stipulations about how the company must be run to achieve them. In some cases, these may emphasise short-term profits rather than the long-term financial objectives of the business management team.

A combination of funding

In practice, most buyouts are financed through a combination of debt and equity, although other hybrid sources such as Mezzanine and Vendor Takebacks may also be used. In general, the management team should pursue capital from the cheapest source first, which will usually be senior debt, before looking at more expensive sources such as equity.

It usually requires a combination of debt and equity that is derived from the buyers, financiers and sometimes even the seller, and can be structured in a number of ways such as a conventional purchase or even a Leveraged Buyout model. In some cases, equity investors may even insist that there is a lending element to the overall funding package.

This can require some complex funding arrangements to balance the needs of the various stakeholders.

This, in turn, means that, whatever the eventual funding structure, it is essential for the buyout team to partner with lenders who have the necessary expertise and flexibility to deliver the kind of hybrid approach required.

It also provides scope for negotiation. With the right support, it is possible to reduce the returns required by equity investors simply because of the availability of large scale lending at a lower overall cost.

Why you need Rangewell to arrange finance for your Buyout

As experts in business funding, we know that the biggest hurdle to an MBO may simply be finding the necessary funding.

We know the equity investment companies who can take a share in your business, as well as the lenders who can provide the level of debt funding to support your plans.

We also know the other solutions - like Commercial Remortgages on your premises and Asset Refinance plans that can be used to support MBO plans. By releasing money from the business to help you buy it, these approaches can reduce your need for external investment.

This means we can help you at every stage. Not only can we look at and source the many different funding sources that your large-scale buyout may require, we can ensure that they work together to deliver an effective funding package which will help you drive down your overall costs.

Unfortunately, searching for the most competitive deal across the entire lending market takes time and expertise. At Rangewell, we know the lenders who can offer the most competitive rates for you, and we find solutions for all types of business finance for your goals.

We help source the entire range of conventional loan products, along with Alternative Funding from new loan providers and styles of funding. Even more important when it is an MBO, we can work with you to tailor the kind of complicated ‘Jigsaw’ Funding plan you will need to support your plans.

We understand the challenges of MBOs. Call us now to get our experts working for you - from buyouts to private equity for management buy-ins.