There are many common issues that arise during an MBO. Marlowe Capital helps put a plan in place to mitigate these types of issues
Funding an MBO
Management teams can be under the illusion that a buyout is not possible because collectively the team members do not have sufficient funds to meet the consideration. This is quite a common misconception.
However the vast majority of the consideration is usually provided by third party financial institutions such as banks, venture capitalists and even the vendors themselves by way of deferred consideration.
Sources of finance for a buyout and their key features are summarised below.
The personal investment required by members of the buyout team needs to be meaningful to each individual taking into account their own financial position and personal circumstances. The sum need not be vast but will typically represent around 6 to 12 months salary.
The investment made by management serves to demonstrate their belief in and commitment to the MBO to third party funders.
Banks obtain their return on investment by way of interest on the sum advanced. The availability of bank finance is therefore reliant on the ability of the business to service the future capital and interest repayments following legal completion of the buyout.
Funding from a private equity or venture capital investor will always be conditional upon their taking an equity stake, usually as a minority shareholder.
The investment returns on a private equity investment are twofold: interest income on the funding provided and capital growth in the equity stake.