Management Buyout (MBO) Funding

Understand

Normally in a Management Buyout (MBO) funding, managers inject minor funds due to lack of financial resources, remaining major portion is being funded through banks, venture capitalists and even by company’s vendors. These finance providers agree to fund the management buyout (MBO) with the certain conditions like to realize the gain from their investment after having a proper exit strategy.

Explanation

Important factors to consider

The type of fund and conditions may vary among finance providers but following points are considered.

The Form of Finance

Management Buyout (MBO) ended up with the controlling interest in the company by current management, making finance providers stuck to funds for remaining shares and unable them to get control of the company. So they are provided with two options either funds the company through debt or with convertible preference shares. As a compromise, both options, debt for security and convertible shares for future participation in profit if things go well are accepted.

The involvement in decision making

Some institutional investor may provide the funds for the condition to participate in decision making.

Exit Strategy

The investing institutions evaluate the company with respect to future earnings because they provide funds with the goal to medium term gain in their wealth.

Ongoing Support

The future willingness of investors to fund later project and consultancy services should also be considered while choosing them.

Suggested options to fund an MBO

Venture Capitalists provide equity with the goal to get the periodic return as a dividend, usually preferred dividend, and capital appreciation or capital gain when investment is realized.

Junior Debt is a type of mezzanine finance in which investor’s return comprises debt interest and option to convert part of the debt to equity. This hybrid option enables the investor to earn premium while selling out converted equity stocks.

Senior Debt requires first ranking security of all assets to be used in an MBO, it also requires undertaking like certain restriction and disclosure of financial information by the MBO team.

Banks also provide Secured loans against first change on assets taken over during the buyout.

Keynotes to consider while Management Buyout (MBO) Funding

Following points are considered while a decision to fund the MBO or not:

  • Does the price being paid is suitable or high?
  • Does management has sufficient competencies to run the business?
  • Why do current owners decide to sell their business?
  • Does cash flows suitable enough to generate earnings in future?
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