Management buy-outs with Mezzanine debt

Posted on: April 11th, 2021


Management buy-outs are one of the highest quality deal types in the eyes of the mezzanine debt lender market for good reason. These deals have far lower integration risk and unknown variable risk than other types of buyouts. When management buys the company, they also usually have a very strong reason to do so, or as Private equity investor might say, they have a strong investment thesis.

Management buyers usually have special relationship with the owners of the company putting them in a favorable position to obtain a purchase price less than fair market value. Often owners feel a sense of obligation and loyalty to their management teams, as they are largely responsible for the success of the company over time. The management team is not just an anonymous buyer to the owner but a valuable stakeholder in the company.

Older sellers usually want to receive a fair price but are also very focused on ensuring the continuity of their companies for the benefit of their employees. Often this means not getting the highest price for the business in the form of a private equity sale, but still getting a good price from a party they know and trust. Management teams are in an enviable position to understand the strengths and weaknesses of the company. They usually have a strong growth vision for the future, underpinned by specific actionable growth steps.

Mezzanine Debt Lenders Role in Management Buyouts

Whereas most buyers are new to a business and an industry, management teams have been there for years and know exactly what they want to do with the business. This is viewed very positively by a mezzanine debt lender. Often in a management buy-out, the purchasing team struggles to raise a large amount of equity or to have the proper relationships in the debt markets to fund the deal. The key for management teams seeking to purchase their company is to understand all the structuring techniques in the management buy-out playbook.

The most important thing is to bootstrap your finite equity dollars into a controlling position in the company. You do not need to invest the same amount in the deal as a private equity investor would. But you need to understand concepts such as purchase price equity, rollover equity and back ended consideration to make sure your management buy-out is a success. These terms will help you articulate your deal to mezzanine debt lenders who are good partners to provide the financing.