Finance for a Management Buy-In (MBI)

Sometimes, a business needs a fresh perspective or injection of expertise to help it grow. In many organisations, existing owners or managers may have grown tired of the enterprise or have failed to innovate. A management buy-in sees an external individual or team buying into ownership of the company and replacing the management team, often giving the business a new lease of life. 

To buy into a business, however, the purchaser needs appropriate funds to buy the shares required to assume ownership. MBI finance lenders can provide the cash you need to make the purchase, though their rates and terms will vary depending on your circumstances, background and plan for the future. 

Rangewell helps individuals and teams buy businesses through finance agreements that work for you. We negotiate with lenders on your behalf to secure the cash you need without hamstringing growth through restrictive terms or soaring rates. With our help, you can effectively raise the finance needed for a management buy-in as well as strengthen your overall capital position. 

What is an MBI?

Private businesses are typically owned by a sole director or a team of shareholders. When changes occur, it is often to the existing team in the way of a shareholder retiring or being bought out by the other directors. However, if someone external to a business wants to buy into it, they must pursue an MBI.

A management buy-in, or MBI, is a business transaction where an external individual or team buy into an existing business. There are plenty of reasons an MBI may take place, including if an existing owner decides to retire, a team seeks to buy out the competition or an individual entrepreneur wants to buy into a business they are interested in. 

The purchasing party, whether a group or an individual, will appoint a new management team to replace the existing one. This will often be the purchasing team themselves, but can also be an appointed team of employee managers. 

Criteria for an MBI

An MBI allows for external managers to purchase a company and replace the old board of directors with their own team. This team will generally bring specialised experience and approaches to the business in an attempt to revitalize it. To be eligible for an MBI, you should be:

• An individual or management team with top-level management experience
• External to the company in question
• Eligible for business finance to afford the purchase
• Ready to perform due diligence on the company to determine the value of the purchase

What are the advantages of an MBI?

While the disruption associated with the transaction is often viewed negatively, an MBI has plenty of benefits for the company in question, including:

• A fresh management team to shake up existing operations
• Specific new experience intentionally brought to the business
• Owners with a vested interest in the company's success
• Employees may be more motivated after a change of ownership
• New clients and contacts become part of the business

What is the difference between an MBO and MBI?

An MBO is a management buy-out. As opposed to an MBI, which represents external parties 'buying in' to the business and assuming ownership, an MBO is typically entirely internal. In an MBO, directors or shareholders within the business buy shares from the other directors/shareholders to consolidate ownership. 

The MBO is a rigorously defined process due to UK corporate structure, with limited companies having to follow a specific route to complete a buyout. An MBI, however, is a different type of transaction entirely and can re-energise a business. As well as providing a way for the business to continue if the existing team is failing to drive results or losing interest, the MBI process can generate renewed growth by bringing in additional expertise, connections and fresh perspectives.

Management buy-in versus a takeover

A Management Buy-In may appear to be similar to a takeover. However, unlike takeovers which may be hostile, and based on the acquisition of public quoted shares, a buy-in tends to be agreed for mutual benefit and is usually appropriate for smaller operations. A variation is the Buy-In Management Buyout - known as a ‘BIMBO’ -  which combines a management buy-in with a management buyout when a company is bought by a combination of existing managers and individuals from outside the company who will join the new management team.

The Buy-in will mean major changes for the company involved, and there will inevitably be some challenges and conflicts of interest to overcome. Most obviously, the vendor may wish to maximise the price for the concern he or she has built up. They may also want to minimise uncertainty for the workforce and for suppliers, while the MBI team will want to keep the cost as low as possible.

But the greatest challenge may be to provide the funding required. Jump to how to finance an MBI or keep reading to learn more. 

How an MBI is structured

The MBI process, like most you'd encounter in the corporate world, has a few standard steps you'll need to follow. These are: 

1. Company analysis: you'll need to assess the company you're planning to buy into to determine if it's the right opportunity for you. This means performing standard market research and also building a picture of the company's finances. You should get a valuation carried out to inform your offer. You may have already approached the director/management team about the purchase but if not, you should begin considering it. 

2. Apply for finance: once you have an idea of the price you're going to offer, you're faced with two choices: fund the whole thing through your own private capital, or seek finance from lenders. The latter is the most common option, but you'll enjoy a more streamlined and successful lending experience if you work with our team here at Rangewell. As independent financial experts we'll secure the loan you need to complete your MBI at the best possible rates and terms. 

3. Offer and negotiation: based on your analysis, you'll submit an offer to the company. Depending on their response, you may need to negotiate specific terms or prices. Once agreed you can progress to the next stage. 

4. Transaction: you'll now be able to purchase the business with the help of a legal professional. You may need the departing management team to create a list of warranties or guarantees that make important statements about the business such as 'I warrant there are no outstanding legal cases against the company'.

Why MBI valuation is critical 

A business's valuation is often determined in-house by internal finance professionals who take the EBITDA and determine share value from it. In an MBO, this valuation should always be double checked by an independent financial professional to ensure the shares are being sold at the correct value and that both parties are happy.

In an MBI, the value of the business may have already been assessed by an external professional if the business is going to be sold on the open market. However, if you're approaching the owner direct or arranging the sale in any other private method, you'll need to find an accountant that can help you value the business and its shares. This valuation must be mutually agreed upon before the sale progresses. 

As part of our work with clients, Rangewell can help you arrange a valuation that is free from any bias and will ensure clarity and a fair price. This, in turn, is important to any financial lender as they will also look for an independent valuation as part of their decision to lend. 

How can you finance a Management Buy-In?

The cost of a complete Management Buy-In will be directly comparable to what it would cost to buy the entire company. However, it is rare that either the purchasing company or individual managers will have the capital reserves required to fund the purchase. Instead, you'll likely pursue a range of funding options meaning that MBIs are, more often than not, funded using a combination of different sources. 

Expect to contribute some personal capital, as even finance lenders will expect a deposit or some form of asset as security. Most MBI's will be a combination of private finances and funds raised from lenders. 

Lenders are typically risk averse, which is a good thing for those aspiring for an MBI, as the lender may be more accommodating due to the less risky nature of buying an established business versus setting one up from scratch. 

The cost of a management buy-in tends to be the same as buying a company outright, though the circumstances involved mean lenders may offer different options compared to buying a business.

There are many ways to deal with these costs. Once a price has been agreed - 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, for example, a conventional purchase or even a Leveraged Buyout.

In practice, MBIs tend to be financed by a combination of funding sources:

A buyer contribution – The management team is usually required to introduce personal funds as evidence of the team’s commitment to the transaction. Those buying in may need to raise the funds by selling off assets or getting a second mortgage on their home.

Asset Refinance – leveraging against the assets in the company, including premises, stock and equipment, can generate a high level of funding. Using the assets of the company to buy the company itself can be a particularly effective solution for those businesses with a large investment in plant and property. A Commercial Remortgage can raise considerable sums and spread the cost over up to 20 years.

Business Loans – business lenders may offer Unsecured Loans, repayable over three to five years, or a larger scale of lending and a longer term with a Secured Loan, with the security provided by other business assets.

Private Equity –  Private Equity firms may be able to advance funding for an MBI, but may impose strict conditions. Their funding often includes stipulations about how the company must be run and may include financial and other objectives.

Vendor Loan – the vendor can help fund the transition by leaving some of their equity in the company as a loan, which will be repaid over time.

Structuring an MBI with Staged Payments

With the support of the right financial expert on your side, you can arrange for a staged payment approach with lenders that helps you assume ownership in a more cost-effective way. In this system, you'll be paid your loan in a staged payment plan that allows you to complete the MBI but pay the departing directors/management team via multiple repayments spread across time.

This is a good approach as it ensures the departing team are still invested in the business' success and that they will keep lines of communication open. If you were to instead pay a cash lump sum, you may find the departing directors have no more interest in the company should any disputes or queries arise. Additionally, any potential client/customer issues that occur following the MBI can be more easily resolved if the departing team is still financially invested in the company. 

What advisors should you use for an MBI?

The most critical advisor you need on your side during an MBI is a finance broker team like ourselves. Without our support, you're at the mercy of lenders and their snap decisions, without any room for negotiation. Working with our team means you'll be able to identify lenders that specialise in this type of transaction, strengthen your application and then have the agreement itself negotiated on your behalf. 

In addition, we would always advise having an independent accountant and legal professional advising you throughout the MBI process due to the strict legality and financial issues involved. However, we can help you identify specialised professionals in both fields if you choose to work with Rangewell. 

If you are ready to buy into an established practice or business, many lenders will be happy to lend. Your status as a professional represents a good business risk, and you can prove the viability of an existing business with accounts and order books.

But not all lenders will be prepared to offer you the most competitive terms or give you the flexibility that you require.

Looking for the most competitive deal across the entire 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.

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

We understand the challenges of MBIs, and the solutions to them. Call us now to get our experts working to provide them for you.