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IF YOU HAVE been presented with an opportunity for a potential management buyout at the company where you work and you believe there is a strong future for the business, then one of your first and most pressing considerations will be the funding.
There are several options for funding an MBO, each with different features in terms of cost, risk and availability. It is in your best interests to consider all the avenues available and to make a well-informed decision that will hopefully pay dividends long into the future.
“Buyers of companies have become increasingly creative as to how to fund their purchases. Sometimes this creativity has arisen out of sheer necessity as, if the money is not immediately to hand, strategies need to be developed to secure it,” says Tom Bodkin, a partner in the corporate and commercial team with Borneo Martell Turner Coulston.
“Other modern funding routes have arisen out of seller desperation, where providing a funding lifeline to the buyer has been the best way for the seller to secure an exit from their business.”
YOUR MAIN FUNDING OPTIONS
The main funding options for an MBO can be distilled into the following groupings,. Tom takes a brief look at each in turn:
PRIVATE EQUITY This route usually involves either venture capitalists, angel investors or high-net-worth individuals investing in the business in return for an equity stake so as to secure a future return on their investment. It may also involve an element of help or mentorship, and you can benefit from leverage of the investor’s contacts.
INDIVIDUAL LOANS In this option, each member of the MBO team takes out a personal loan (if required), which may be unsecured or sometimes secured against their own property. The liability for repayment rests with the individual members in their personal capacity.
LEVERAGED FINANCE Here the loan is secured over the assets of the company being acquired. In this sense, you could think of it as akin to buying a house with a mortgage – the asset itself is used as the means of securing the finance. The business assets are therefore at risk until the loan is repaid.
STANDARD BUSINESS LOAN In this case, a business loan is obtained but on an unsecured basis. The liability for repayment rests with the business, but it is not secured directly against the business assets.
SELLER FINANCE This option can be a little more creative and is not ‘one size fits all’. For example, options include:
- A simple deferred consideration, where the purchase price is paid over time (often from business profits);
- Seller sliding equity, whereby the seller is paid off over time and their equity stake diminishes with each tranche paid; or
- Where the seller takes a private mortgage over business property or takes some other form of security to ensure that they are paid for their shares.
How Borneo Martell Turner Coulston Solicitors can help
We can evaluate your situation and help you identify the best way forward in terms of your MBO funding options and many other aspects of the potential transaction.
For an informal conversation, please contact Tom Bodkin in the corporate and commercial team on 01604 622101 or email .
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.