If you’ve decided to embark on an MBO, you might have asked yourself, how is this funded? Generally, members of the buyout team are required to invest a sum of personal money into Newco but it would be unusual for them to fund the whole transaction. The equity provided by the management is necessary to demonstrate their commitment to the transaction, therefore it needs to be meaningful, yet it does not have to be too vast – typically representing 6-12 months salary. So, how is the remainder of the MBO funded?
Seller Financing
A common option to fund an MBO, seller financing is where the management team asks the seller to help fund the MBO. This is also known as deferred consideration, as the seller is deferring a proportion of their payment of the purchase price until after completion. While the seller would more than likely prefer the consideration paid in full on completion, often lenders may request that a portion of the sale is financed by the seller, as it demonstrates that the seller has confidence in the management team and the company going forward.
Bank Funding
A bank loan is an effective way to finance an MBO, but only for a business that has a strong future cash flow in order to initially obtain, and then repay, the debt.
Private Equity
Private equity is a way to obtain funding for an MBO; however, bear in mind that this will be conditional on taking a minority stake in Newco. Also, private equity funders might have different objectives to the management team, as they require substantial growth in a relatively quick timeframe in order for them to sell within 3-5 years.
Whichever way you decide to structure and fund your transaction, Benchmark International is here to help you find the best deal that works for you.
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Call Benchmark International today if you are interested in an exit or growth strategy or if you are interested in acquiring.
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