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Management Buy-Outs

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28 April 2014
The below article was featured in the May 2014 edition of Cotswold Life Business & Professional Magazine. To read the full magazine please click here.

Management buy-outs (MBOs) are becoming an increasingly effective exit mechanism, with owners putting the business in the control of a trusted management team.

Although a trade sale may realise more money, owners are often concerned about a trade purchaser dismantling the work force.

Other advantages include: 
  • Increased probability of successful completion.
  • Less time consuming sale process.
  • Rewards key employees.

Key requirements for an MBO are: 

  • A competent management team, with a track record of delivering profits and growth.
  • Realistic vendor price expectations
  • A credible business plan and forecast model.

An MBO is often structured by forming a new company to acquire the shares of the existing company. The MBO team normally invests the equivalent of one to two years’ salary, with the balance of funding usually being provided by:

Asset Based Lenders (ABLs) - Facilities usually come in two forms 1) a revolving facility, which changes depending on the level of debtors and / or stock, and 2) a term loan, typically secured on a company’s fixed assets. Debt is secured and therefore tends to be cheaper than private equity and vendor debt.

Private Equity - Private equity firms will usually take a mixture of debt and equity and look to realise their equity investment within three to five years. Although a private equity partner will want to exert a level of control, they can bring a wealth of expertise to a business.

Vendor Finance - Vendor financing structures vary considerably; some leave part of the consideration in the company as a vendor loan, while others take a minority equity stake in the MBO company.

The role of a corporate finance advisor is critical, not only because of their experience in raising finance, but also in structuring such transactions.