FINANCE
BY EDDI TAYLOR , PARTNER , AZETS ASHFORD
Funding a Management Buyout
PLANNING FOR SUCCESSION IS A REALLY IMPORTANT ASPECT OF ENSURING A BUSINESS ’ S LONGEVITY , AND IT SHOULDN ’ T BE UNDERESTIMATED HOW LONG IT CAN TAKE TO PUT AN EXIT STRATEGY INTO ACTION . ENSURING A SMOOTH TRANSITION WILL TAKE MANY MONTHS AND SOMETIMES YEARS OF PLANNING .
One of the main ways of exiting a business is through a management buyout ( MBO ).
Why an MBO ?
The best MBOs will have been considered carefully in advance and will have involved substantial planning , often meaning a gradual exposure of the management team to the dayto-day running of the business and strategic decisions over time .
An MBO can provide a vendor with a number of positive non-financial considerations compared with selling to an external buyer , including :
• Potentially better job security for the workforce .
• Continuity for customers and suppliers .
• Less disruption overall as the deal requirements are completed with full cooperation and understanding .
• A greater chance of success and legacy , as the management will already have an in-depth knowledge of the business , its products , services and markets .
It is important with an MBO that preparation time is used positively , providing an opportunity for the advisors to work with the management team to ensure they clearly understand financial information , start to think strategically and line up any funding required for the final transaction .
Management equity
Financing a buyout through management equity is a potential route but rare - it is a common misconception that the management team needs to fully fund an MBO by itself . Typically , those taking on the business will invest proportionately based on their proposed role and their own financial circumstances , in the knowledge that their personal contributions convince other lenders of a clear commitment to the long-term success of the business .
Third-party lending
Deferred consideration is involved in the vast majority of MBOs and is effectively the vendor acting as a funder . Third-party lenders may require an element of deferred payment to ensure the vendor is also committed to the transition . Whilst we are seeing some challenges in the funding market at the moment , the non-financial considerations are often deemed to lower the risk for funders , mitigating the impact on the ability to fund a transaction .
Private equity
MBO funding is also available through private equity firms with an investor acquiring shares in the business , often as a minority shareholder . The total finance is often split between debt and equity elements . The investor is paid interest on the debt element , potentially dividends as a result of the shareholding and will seek to support growth in the business to benefit from increasing capital value .
Planning ahead
Many MBOs still rely on traditional bank finance including loans and invoice finance - the new management team will need a financial plan in place to demonstrate it can meet the bank ’ s repayment and security requirements . Furthermore , different funding options will have different tax implications and therefore getting appropriate advice on a coordinated basis is important .
Whichever route is chosen , planning ahead is essential for a successful MBO ; historic financial information and projections need to be robust , and the management team will need to demonstrate strong knowledge of the business and an ability to replace the vendors in all aspects of their roles . It can be an interesting time as the dynamics move between the parties as the transaction progresses . This is necessary to build the funder ’ s confidence in the management team ’ s ability to successfully continue running the business .
T : 01227 454861 E : eddi . taylor @ azets . co . uk
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