Finding the best funding solution for your MBO
Funding an MBO
Most management teams think an MBO is out of the question because they do not have the full funds to buy the company. In actual fact, when funding an MBO the management team are usually only required to invest a relatively small sum as the rest is funded by institutions such as a bank or private equity house.
Sources of finance for an MBO and their key features are summarised below. Typically a combination of these different sources of MBO funding will be used.
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Cash Invested by Management
The amount of investment by the management team will be dependent on personal circumstances and the extent of any existing shareholding in the business. Generally, funders want the management team to be committed and look for an investment that the management team wouldn’t want to lose – typically known as hurt money.
A broad ‘rule of thumb’ is a sum of money that equates to one year’s salary for each team member but the amount invested can often be less.
Institutional Equity is funding provided by a private equity firm or venture capitalist in return for an equity stake in the company. The investor benefits from interest income on the funding provided and capital growth in the equity stake.
- Access to large sums of equity finance
- Greater funding flexibility
- Can invest without the requirement for asset security
- Experience and expertise from the funder’s board representatives
Debt funding does not usually involve giving away a stake in the business. Funding is provided under pre-defined terms and re-payments are made according to a fixed schedule.
Banks and Asset Based Lenders typically provide funding against assets including debtors, stock, plant and machinery, and property.
- Advances against debtors and stock are typically a revolving facility with no capital repayments until the facility is terminated. This can aide working capital.
- Debt is secured so it can be cheaper than private equity
Cash Flow Loans are provided by the debt funder using the expected cash flows that a borrowing company generates as collateral for the loan. The availability of these loans is dependent on a history of good cash generation.
Instead of the full consideration being paid to the seller/vendor on the day of completion, the vendor can agree to fund part of the buyout via deferred consideration or an earn out.
Deferred Consideration is when a vendor defers all or part of the proceeds from the sale of a business and agrees that the purchaser can pay this over time from cash generated by the business. Payment can either be in one lump sum or in stages.
Earn out is when a portion of the purchase price is contingent and is calculated based on the performance of the acquired business over a specified time period following completion. Earn-outs are intended to bridge a valuation gap between an optimistic seller and a sceptical, or cash strapped, buyer. Earn-outs potentially allow sellers to achieve a higher price and provide buyers with an additional financing option to pay for the acquisition with future profits of the business.
The right MBO funding package for you
The role of a Corporate Finance Adviser in the fundraising for an MBO is vital. Every MBO is different so every funding package needs to be tailor made. At SamCorp we have an extensive network of equity and debt finance providers, which enables us to tailor the funding for individual circumstances and achieve an appropriate and cost effective funding solution for our clients.
For more information on Management Buy Outs click here.
What our clients say
SamCorp started by advising on the initial acquisition and progressed to help find the right equity and debt funding partners to fund our growth. Throughout the process I found them to be professional, hard-working, and with a keen understanding of the trials and tribulations that all such transactions inevitably go through.John Onslow - CEO IGF Group
Darren Hurdle of SamCorp was instrumental in us achieving this result. He ensured we were providing the right information, in the right format, to the right people, at the right time so that we were able to clearly articulate our ambitions for the business and ultimately gain the support of the funders. His links to local professional services and the wider finance groups was extremely important to us as well. I enjoyed having him working alongside us, guiding us through the process in a way that was encouraging and helpful without resorting to jargon.Steve Merritt - European Process Plant
The commercial advice from SamCorp was invaluable to help negotiate and structure the deal whilst ensuring we were sufficiently funded post completion.Tim Black - Managing Director Black & Callow