How to finance a MBO

Funding a Management Buy Out: What you need to know

If you’re considering conducting a management buyout (MBO), there are various means by which you can fund it. Financing commonly involves a level of personal funding by individual members of the management team combined with additional external borrowing, such as bank loans and asset financing.

Private equity may also form part of the funding equation, but there could be a range of different choices, including mezzanine finance, which is a combination of debt and equity funding.

An MBO can be a lucrative move for an existing management team, as you already understand the business and are more likely to make it succeed compared with external buyers that are new to the organisation.

So, what are the potential options for financing an MBO?

How to fund a management buyout

Personal funds/personal loans

Putting some of your personal monies into the buyout demonstrates confidence in its success, which can encourage third-party lenders to sanction any remaining funding needed. Personal savings or personal loans with fixed monthly repayments are commonly used in this situation.

Secured and unsecured business loans

Both secured business loans and unsecured business bank loans often form part of the mix when financing a management buyout. Loans secured on a physical asset tend to be easier to obtain than unsecured loans, which present a higher risk for lenders.

Asset refinancing

If the business already owns assets of value, they can be leveraged to fund the MBO. In this case, a lender buys the asset from the company and leases it back with no break in usage rights. High value assets, such as machinery and equipment, can provide a significant sum to finance the MBO, whilst protecting cash flow via a fixed repayment schedule.

 Private equity

If dilution of equity isn’t an issue, private equity funding may help to finance the management buyout. It involves private equity firms taking a stake in the business in return for investment, but they typically have a fixed exit strategy in place after which new financing may be needed.

Mezzanine finance

Mezzanine finance combines debt and equity funding and may be an option for partially financing an MBO. In this instance, if your company defaulted on repayments, the lender would take equity in the business as a failsafe.

Vendor loan

If you have problems securing sufficient debt or equity financing, a vendor loan could help you fund the MBO. This involves the seller providing finance to the management team that’s buying out the business. The vendor then receives repayment over time with interest.

How to apply for MBO finance

With so many options for financing a management buyout, it’s crucial to seek specialist guidance on the most suitable products. UK Business Finance are established commercial finance brokers who understand the requirements and nuances of MBO transactions as well as those looking to partake in a management buy-in.

We search the whole of the market for the best deals and will ensure you understand the implications of each type of financing. Please get in touch with one of the team for more information and guidance on the best ways to fund a management buyout.