Funding for Buy-Ins and Buyouts

There are several ways to acquire a business or an interest in a business.

What is a Management Buyout (MBO)?

A Management Buyout allows a company owner, or owners, to sell their business to the existing management team. This may be preferred to a trade sale for a variety of reasons, especially if the owner feels strongly that the company and its staff carry on independently in familiar safe hands.

Since the new owners know the company, the risk of failure is reduced, and employees and trading partners can be reassured it will be business as usual. The internal changes and transfer of responsibilities between the vendors and management can remain confidential, while any due diligence required by funders can often be handled quickly.

How do Management Buyouts (MBO) work?

In its simplest form, an MBO involves a company's management team combining all available resources to acquire some or all of the company they're managing. The management team will take full ownership to grow and drive the company forward most of the time.

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How to fund Management Buyouts

For an MBO to be successful, vendors must be willing to sell the company at a realistic price and with a deal structure that is acceptable to both parties. Management Buyouts can be structured in a number of ways, such as a conventional purchase or a Leveraged Buyout model.

Leveraged Buyouts are often used because few management teams have the resources to buy the target company outright. They need external financing to facilitate the purchase and are often interested in leveraging some of the assets of the target company.

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In practice, MBOs are usually funded via a combination of sources:

Management contribution

If they are unable to fund the whole transaction, the management team is usually required to introduce personal funds, Funding companies consider it a gauge of how committed the team is to the transaction. It is not unusual for managers to raise the funds by selling off assets or getting a second mortgage on their homes.

The management team's financial contribution is very important.

Asset Refinance

Asset refinance helps to leverage against the assets in the company, usually, property, stocks or capital equipment, which can allow the buying team to raise a high level of funding.

Borrowing

In addition to asset finance, lenders may provide an unsecured loan, repayable over three to five years, to support an MBO. A larger scale of lending may be provided by a secured loan, with the security provided by other business assets, or by their home.

Private Equity

This is an increasingly popular source of finance even at the smaller end of the market with many funds looking to back management teams to scale their company. Private Equity firms usually want liquidity after 3 to 6 years and expect to take their profits then. Their funding often includes stipulations about how the company must be run and what financial, and other, objectives have to be met. Remember that the private equity firm is looking to maximise its own returns, rather than building a sustainable future for the business.

Vendor Loan

The vendor can help fund the transition by leaving some of their equity in the company as loans to be repaid over time. This may be required by some lenders who seek evidence that the plan is seen as fully viable by the sellers.

What are the advantages of an MBO?

Here is a breakdown of the advantages of MBO:

• It tends to be easier to agree on the value of the business because the vendor knows the people they are negotiating with, and the buyer will be familiar with the company
• Negotiations with the existing management team will help ensure that the information will remain within the business
• The sales process will be faster
• The vendor will have more control over the process than a third party's sale
• The MBO is a good option for businesses that may be too small to attract a buyer

What are the disadvantages of an MBO?

Here is an overview of the disadvantages of an MBO:

• The business valuation may be lower than what could be achieved through a traditional sale
• The management team may be skilled at their roles but not too up to scratch with the broader skills to be a business owner
• The management team may struggle to raise significant funding
• The management team may need to inject some of their funds, and they may not have the wealth to do this 
• If the MBO doesn't process, this presents a risk to the vendor's relationship with the current management team, which may affect the business in the future

What is a Management Buy-In (MBI)?

A management buy-in occurs when a manager, or a management team, from outside the company buys the entire company and becomes the company's new management. Acquiring a company in this way may appear to be similar to a takeover, but is usually appropriate for smaller operations. In addition, management buy-ins are usually amicable and simply represent the sale of a company, unlike takeovers which may be hostile, and based on the acquisition of publicly quoted shares.

A buy-in management buyout - known as a ‘BIMBO' - combines a management buy-in with a management buyout. In this case, the company is bought by existing managers and individuals from outside the company who will join the management team.

How does a management buy-in work?

A management buy-in (MBI) is where an outside manager or management team take an ownership stake in an outside company and will replace its existing management team. This occurs when undervalued, poorly managed, or requires succession.

How to fund a management buy-in

Solutions for funding a Partner Buy-In will depend on the scale of funding required. The scale of funding required with larger businesses may make some form of secured loan necessary. It may also be possible to arrange a Practice Loan effectively a form of advance secured on the future performance of the business.

What are the advantages of a management buy-in?

Here are some advantages of MBIs:

• If current owners of the company cannot manage the company, then an MBI can be a win-win for buyers and sellers. New management may have a higher level of knowledge and experience, which they can use to revive the business
• New management can bring across new contracts, which will be new business opportunities for the company
• Existing employees may welcome a change of management if the company isn't performing well

To find out more about the combination of debt and the due diligence process, speak to Rangewell today.

What are the disadvantages of a management buy-in?

Here are some disadvantages of MBIs:

• Incumbent management team may lack the ability to buy the business outright from the current owner
• If management decides to buy, it may require additional financial help. This will mean other debt
• Debt repayment can eat into profit
• New management may fail to bring the proper growth. In addition, existing employees may not appreciate the new management style

To find out which source of funding worked for you, Speak to Rangewell today!

Why you need Rangewell to find finance for your business buy-in or buyout

If you are planning to buy into an established practice or business, many lenders will be happy to lend to you. Your status 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 the most competitive terms or provide the flexibility that you need.

Looking for the most competitive deal across the entire market takes time and expertise. We know the lenders who can offer the most competitive rates for you, and we find solutions for all types of finance, including professional loans, unsecured and secured finance, invoice finance, asset finance, Merchant Cash Advance, commercial mortgages, growth finance, growth equity financing and mezzanine finance. As well as conventional loan products, we can help you find Alternative Funding, using new loan providers and styles of funding.

Whether you have a straightforward, small-scale funding need, or require a complicated ‘Jigsaw' funding plan made up of a combination of financial products, we can work with you to find the answers.

Call us now to get our experts working for you.