A management buyout, or MBO, is similar to a leverage buyout in that, the “buyer” does not have the necessary funds to be able to purchase the “sellers” company without obtaining some sort of loan. A MBO is a specialized form of an acquisition where the managers, specifically, of the company wish to attain a large portion or all of the company from their private owners.
There are several options management can use to acquire a company through an MBO:
Seller financing: Seller financing is simply what it sounds like. It is when the “buyer” asks the “seller” to finance a portion of the acquisition. Most often, the “buyer” offers a down payment and the “seller” will accept the rest of the amount as a promissory note.
Integrated debt: Integrated debt combines amortizing and revolving debt facilities that depend on the company’s balance sheet assets and it’s cash flow. This debt structure is a great financing option as well because it allows for a sufficient amount of working capital and a lower demand on capital repayment in comparison to traditional senior debt.
Senior cash flow debt: Senior cash flow debt, also known as bank debt, concentrates on the company’s future cash flows. This would be a perfect financing option for a business that has strong upcoming cash generation. Senior cash flow debt is better known as a “term.”
Asset-based financing: Asset-based financing is beneficial for those companies that are rich with assets. This type of financing is structured as revolving loans secured by the assets and collateral that the business owns. These assets can come in the form of inventory, accounts receivable, equipment, and fixed assets. Asset based financing can also be set up as a term loan.
Mezzanine financing: Mezzanine financing is a form of structured debt that lies between senior debt and equity in the company’s capital structure. The benefits of funding through mezzanine financing include higher amounts of money with no personal guarantees to the owner or the management teams.
Unitranche debt: Unitranche debt combines features of both mezzanine debt and senior debt. Its structure is dependent on the specifics laid out within the deal. Company’s use unitranche debt when senior debt does not afford the appropriate amount of leverage required to complete the transaction.
By understanding which finance option best fits to your business, you can successfully and efficiently complete a management buyout.
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