Private Equity for Management Buy-Ins

Where there are no obvious successors for a family business, or a corporate owner wants to dispose of an asset that is no longer part of their core business, it may be possible for an external management team to take it over.

A Management Buy-In, or MBI, occurs when an individual or a team from outside the business acquire it and becomes its new management. 

A variation is the Buy-In Management Buyout - or ‘BIMBO’ - when a company is bought by a combination of existing managers and individuals from outside the company who will join the new management team.

As well as simply providing a way for the business to continue, it can re-energise a business that has been underperforming.

Unlike takeovers of large businesses which may be hostile, a Buy-in tends to be agreed for mutual benefit and is usually appropriate for smaller operations.  

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. With a large business that commands a correspondingly high price, the answer may be Equity Finance.

Equity Funding

Shares in a business are described as ‘Equity’. An Equity Investor is, therefore, a part-owner of the business, and in the case of equity investment supporting an MBI, it means that an internal investor will take a stake in the ownership of the business in exchange for their funding. They are entitled to a proportion of the profits, as well as the capital value.

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.

The majority of Private Equity funds prefer 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 investor has a higher risk than a lender. The return investors demand is correspondingly greater.

Equity, therefore, represents an expensive source of capital investment - but despite this, the scale of funding required in the MBI of a large business may mean that private equity may be the only practical solution. 

At Rangewell, we can help find the equity investors you need - and ways to reduce the drawbacks of equity funding for your MBI plans.

A combination of funding types

Most Buy-ins that use equity use other sources of funding as well. Hybrid sources such as Mezzanine and Vendor Takebacks may also be used - but the main alternative is borrowing.

A suitable business loan or loan package could provide a proportion of the funds required more cheaply than equity investment. In general, the incoming team will seek to maximise the debt funding, allowing to reduce the overall costs. 

This means 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, and it is essential for the team to partner with lenders who have the necessary expertise and flexibility to deliver a hybrid approach.

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 arranges finance for your Buy-in

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

We know the equity investment companies who may be prepared to provide the funding you need, the lenders who can provide the level of debt funding you want and the most cost-effective types of funding.

It means that we can work with you to create a funding package with equity investors, a Secured business loan, and solutions like Commercial Remortgages and Asset Refinance plans to drive down the cost.

This means we can help you at every stage. Not only can we find the many different funding sources you need, but we can also ensure that they work together.

It means paying less for your MBI funding.

Call us now to get our experts working for you - from buyins to private equity for management buyouts.