You know the kind of profits your new business will be generating from day one, and avoid the costs and uncertainties of setting up. But although you have a better chance of enjoying real rewards, you can be certain of having real costs to deal with.
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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.
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:
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 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.
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.
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.
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.
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.
REAL EXAMPLES OF WHAT WE CAN DO
Source a professional loan to allow a newly qualified chiropractor to buy a partnership in an existing practice
Find the most competitive asset refinance deal to allow the manager of a transport company to buy out its owner
Help a dental professional arrange ‘jigsaw’ funding to allow her to acquire an existing practice
Find mezzanine finance to allow the management board of a medical equipment company buy the business from the corporate owner
Produce funding for a lawyer ready to buy into a prestigious London partnership
Discover our range of finances
Every type of finance for every type of business
Our goal is very simple - to help businesses find the right type of finance as quickly, transparently and painlessly as possible.
Helping you build your profits
Lending tailored to your needs
At Rangewell we can help you find the most appropriate finance for any type of Buyout or Buy-In.
Funding scaled to your needs
Funding solutions are available for your plans whatever the size of business, from tens of thousands of pound to tens of millions.
Cutting the costs
We can help you find the most cost-effective solution for your needs.
Reducing risk with expertise
Our expert teams understand all aspects of business funding. Their expertise works to support you and reduce your risks.
Releasing the value in your business
Asset Refinance can help you release the value in the business to help you buy it.
At Rangewell, we can help you find the most appropriate lenders for your sector.
Download Rangewell’s free and detailed guide to Finance for Buy-Ins and Buyouts
What types of finance are there - which do you need?
Why not all providers are equal - finding the one that’s right for you
How we can provide an additional income stream
The downsides to finance - and how to avoid them
How to arrange finance - what paperwork do you need?
Key terms explained
Can I find finance to help with cash flow?
How can you finance your management buyout (MBO)?
Do the management teams have any bearing on being accepted for finance?
Will a private equity firm be involved to run the business?
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Frequently asked questions
Have a question?
How do you organise a management buyout?
The critical steps of an MBO are:
The initial appraisal will happen to understand the financial, market, service, people, and growth.
Understanding what the sellers are trying to achieve
Supporting the MBO in the development of the business plan and detailed forecast to grow
Undertaking the valuation and evaluating the idea deal structure
Detailed financial analysis is conducted
An evaluation of tax consequences is undertaken
Approach to funders - a small buyout may involve just one funder; some require more than one
Offers from financers come through
Preferred financers are selected
Legal drafting and tax consequences are appraised
Due Diligence issues will be addressed
Completion and change of ownership will take place
Preparation of management team for their next board meeting
To find out more about private equity houses, and private equity investors, speak to Rangewell today.
What is an example of management buyout?
A famous example of management buyout is when Michael Dell, the founder of Dell, paid $25 billion in 2013 as part of a management buyout of the company he funded initially, taking it private to have more control over the direction of the company.
To find out private equity funds and private equity finance, speak to Rangewell.
What is the difference between an MBO and LBO?
LBO or 'leveraged buyout' happens when an outsider arranges debts to gain control of a company. MBO is a management buyout when the managers themselves buy stakes in the company and ultimately own the company.
To find out more about leveraged management buyout or how to do a successful management buy-out. Speak to Rangewell today. Our experts know about private equity funding and can help source a deal to suit your needs.
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