Key Steps to Finance a Management Buyout

Management buy-outs are great for management teams, provided they are well planned, structured and implemented. Due to the inherent conflict of interest when the management team is the buyer of the company, it is important to have a team of advisors to ensure objectivity and arm’s length distance. Management buyouts are the best form of buyout in the market and are the most efficient way to align management and ownership. They require a high level of understanding and attention to detail to pull off successfully. There are 5 key steps to finance a management buyout successfully.

  1. Learn Your Financing Options – most management teams are unfamiliar with the types of loans in the market available to finance a management buyout. There are banks, funds, hybrid finance companies that provide about a dozen different loan structures. Take the time to research the different forms of loans and educate yourself on the pros and cons of each.
  2. Develop your risk reward profile – some management buyouts are done with 100% loans. Some are done with 30% equity and 70% loans. The more equity the management team invests, the lower the loan amount and the lower the risk of overleveraging. Lenders require some skin in the game in order to make the loan. The investment of equity creates a different mindset for the management team, which is helpful in their building long term value.
  3. Learn the differences between a bank loan and a mezzanine loan – your management buyout is likely to have different layers, much like a three layer cake. The bank has different underwriting criteria and requirements than a mezzanine lender. You have to pick institutions that can work together cohesively to get the deal done.
  4. Decide your growth plan – buying the company is easier than growing the company. In order to grow the company, you have to ensure that extra capital is allocated as part of your overall financing structure. Whatever your growth path is, make sure that you have funding to pursue it. Buying a company with no growth capital is like buying a car without any gas in the tank.
  5. Prepare your information – management buyouts require a high degree of planning, communication and financial presentation. Most management teams are not ready for the scrutiny of lenders and investors. They should undergo boot camp preparation to ensure that their financial statements and corporate presentations are up to date and high quality.
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