Is Your Company A Management Buyout Material

A management buyout, or MBO, is when a management team looks to acquire a substantial share or all of a business from the owners, but does not have the necessary funds available to make the acquisition. To complete the buyout, the management team agrees to a promissory note or finds financing from an outside source whether it is integrated debt, asset-based financing, mezzanine financing, senior cash flow debt, or unitranche debt. So how do you know if your company is management buyout material?

  1. What is the company’s value? It pays to know the market value of the Company before you move forward with the seller.Often, a seller will give the management team a preferential price. This discount to market value can be used as part of the down payment of the purchase price.Overpaying for the business just to control it should be avoided at all costs. You should use third party valuation experts who can give you an objective view on the value.
  2. Is your balance sheet a fit? Does the balance sheet have the strength to leverage” this buyout? Often, management teams seek to leverage underutilized assets on the balance sheet to fund the purchase price. This should be done carefully as you need to have working capital availability to run the business after the buyout.

    If you purchase the business with senior debt, does the company have the capabilities to apply free cash flows from the business to pay off the principal and interest expenses without disrupting normal cash flow operations?

  3. Is the working capital low and cash flows high? This defines a company that is ideal for a management buyout. Low working capital is a sign of working capital efficiency. High cash flow is a sign of high margins. Low working capital intensity indicates the company is likely to produce more free cash flow that can be used to pay down debt as it grows. Often, balance sheet changes and the need to fund equipment, receivables, inventory when growing, makes it harder for a business to service debt. The only way to mitigate this is through performing monthly balance sheet forecasts and assessing balance sheet impacts on free cash flow.

By considering these factors, you can successfully complete a management buyout.

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