Raising funds for a Management Buyout or Management Buy-in

MBO’s and MBI’s

When exploring a potential fund raise for a Management Buyout (MBO) or Management Buy-in (MBI) with a client, we primarily need to understand 3 key points;

  • What are they buying?
  • How much are they paying for it (Consideration)?
  • How are they funding it?

 

When asking these questions, we’re looking to gain an understanding of the following;

 

What are they buying?

Essentially we need to know if the acquisition is a share purchase or an asset purchase. A share purchase will involve taking over a company i.e. taking over the legal entity which will include all of its assets, liabilities and obligations (including any inherent or historic problems). An asset purchase however, is the transfer of a specific business activity and related assets and employees.

 

How much are they paying for it? 

The next element of the transaction is the consideration i.e. how much they are paying for the business (whether asset or shares). Once we know that we can undertake the due diligence to see what funding can be raised against the business assets, what the management are looking to inject and therefore what if any shortfall there is

It’s crucial that the client understands how and why the business has been valued at the agreed amount, and how and when this value is achieved. Generally, consideration is structured in the following ways;

  • Payment in full to the outgoing owner upon deal completion
  • An element of the payment to be paid upon completion with the remainder of the consideration deferred over a set period of time (deferred consideration)
  • An element of the payment to be paid upon completion and the business owners are financially incentivised to manage the company for a period of time with the ability to earn higher payments as set milestones are achieved (Earn Out)

 

How are they funding the purchase? 

Now comes the tricky bit. Does the acquiring party have the means to pay for the transaction themselves or will they need to raise finance to fund the acquisition? Typically, our clients need to raise funds to facilitate an MBO and MBI. This can be done in a number of ways, however, we generally explore the following;

  • How much cash is the client expecting to put into the transaction?
  • Are there any assets that sit within the business which can potentially be used?
  • Would the historic performance of the business support term debt?
    • Working capital loans can be used, however, they tend to occur post transaction
  • What security is the client able to provide to support additional funding facilities?
    • PG’s
    • Personal assets
    • Associated business assets

 

If the MBO/MBI requires gearing up a business to facilitate the transaction, don’t forget about working capital! all parties will need to be comfortable that the new facilities/debt can be comfortably serviced by the company, and crucially, it remains viable going forward.

Remember choose a good corporate finance advisor as it can save you a lot of money in the long run!

 

Graeme Harrison

Business Development Director – Corporate and Commercial Business Solutions Group