How to finance a management buyout

A management buyout (or MBO in its abbreviated form) is an important step for a business when the existing owners or shareholders decide to release full control and ownership to the management team. The most common reason for an MBO is a change in financial circumstances and rather than putting the business up for sale the most logical step is to encourage the existing management structure to take over the ownership.

An MBO involves several steps and can often take between 3 to 6 months to complete. Therefore, it is very important that all parties seek the right specialist support from business lawyers, accountants and business finance experts.

There are many benefits to an MBO, it offers a smooth transition to new ownership and means minimal disruption to staff, partners, suppliers and customers with the business being able to run as normal throughout the entire process. In addition, the new management team will be fully aware of the company history including confidential and sensitive information, having this complete visibility makes the transfer of ownership a great deal smoother.

Arguably the most complex stage for the management team is finalising a structured financial plan to complete the business purchase. Often individuals will not be in a position to personally finance the acquisition, therefore they need to find a suitable finance solution which will suit all parties involved. Alongside this, and due to the complex nature of the MBO, a traditional bank loan again is not a favourable solution.

Here are 3 of the most common forms of lending which can be used to facilitate an MBO:

1. Asset finance – the business can use any substantial asset as collateral for securing finance, this can include machinery, stock and property. In essence you leverage the value of the asset to secure the cash needed to proceed with the MBO.
2. Invoice finance – using the invoices which have not yet been paid the business can raise funds immediately which is secured against the business debtors.
3. Mezzanine finance – this form of lending is a fusion between debt and equity financing it is also beneficial as it is a tax-deductible debt.

If you have any questions or would like to learn more about the financial options available for a management buyout, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.