A management buy-in (MBI) is one of the options available to you when you are looking to sell your company. Unlike a management buy-out, this team is external to the existing business and can bring a fresh perspective.
However, for an MBI to occur smoothly, a number of barriers need to be considered. The most prominent is financing the transition, with MBIs typically requiring substantial investment from the buying team.
Our blog explores the funding solutions available to enable a management buy-in, including how each works and moves you towards your goals.
Asset-based lending
Asset-based lending covers many forms of funding, including invoice discounting, trade finance, stock finance, commercial mortgages, cash flow loans, etc.
By using them, you can raise substantial funding and ease any cash flow pressures as the company adjusts to new leadership and processes.
The lending solution you utilise will depend on the assets you have to utilise as collateral. For example, if you have unpaid invoices, invoice finance is useful or a mortgage can be used against owned premises. In some cases, the business you purchase may bring equipment and stock that can then be used to access funding.
Secured loans
One of the most common sources of finance for an acquisition of any kind, including a management buy-in, is a loan. A secured loan enables you to raise substantial sums for the process, if there are sufficient assets in the target company.
With a secured loan, you utilise assets against the funding, which a lender can then repossess if you fail to repay the debt. This reduces the risk for the lender, which is why you usually raise a higher amount than an unsecured loan. It also lowers interest rates.
As the borrowing party, you utilise the assets acquired as part of the buy-in as security for the loan. These fixed assets are typically property, plant and machinery and the like
It is probable that the lender may expect a personal guarantee as well. This does come with the associated risk, so it’s wise to protect yourself with personal guarantee insurance.
Unsecured loans
The alternative to secured loans is unsecured loans. These are a higher risk to lenders due to the lack of security. As such, the amounts being raised are likely to be lower with higher interest and fees charged.
The advantage, however, is that assets are not required as collateral. This gives broader access, especially for those who cannot leverage any security.
Despite the lower amount typically raised through an unsecured loan, it can still contribute towards the MBI process and fill a funding gap left by other external finance.
Private equity
Another option for raising external finance is through equity investment. Private equity could provide additional funding to supplement the debt finance, provided you work with the right investors.
Seeking private equity will take time. It requires identifying the appropriate contacts or the use of corporate finance advisors. Even when you find investors to approach, many may be uninterested or reject your proposal in the early instances.
You need to convince any investor you wish to work with that there is growth potential in the business being purchased and that you will drive it to success. This is especially key if the company is failing and requires a turnaround. Having an effective plan you will pitch to win over funding is crucial.
There are additional benefits associated with private equity investors. However, there are also considerations you need to make. For example, these investors tend to be more hands-on than lenders, giving them an influence in your business decisions.
You will also be expected to deliver a return on investment, increasing pressure on the new management team.
Private equity companies will often structure any investment deal as a mix of equity and debt finance.
Mezzanine finance
Mezzanine finance combines debt and equity, offering flexibility to create deals that suit many needs.
The technicalities behind mezzanine finance will vary. In some cases, a convertible loan note is taken out, which later converts the loan into an equity share at an agreed period.
In other instances, shares are used as a form of collateral. This gives the lender reassurance that they can convert to shares that hopefully will grow in value in the event of default. In both examples, the lender’s risk is reduced without the need for ‘traditional’ security.
Due to the reduced risk and bridging of debt and equity, it is possible to raise higher sums of funding through mezzanine options – which may go some way to cover the MBI. However, you must ensure any mezzanine solution you use is carefully planned to ensure you receive a good deal and you meet all covenants.
Conclusion
A management buy-in is becoming one of the most common acquisition forms for owners exiting businesses.
One of the many challenges you will need to overcome is finding sufficient finance to cover the MBI. The key is identifying a solution (or combining solutions) that offers you the funding you need without overwhelming the business.
With appropriate finance in place, you will focus on manufacturing a deal that works for all parties and enabling the smooth transition of ownership while facilitating a new chapter for the purchased business.
If you are looking to finance an MBI, we will take you through the potential solutions and help you progress the process.
Get in touch with us today to discuss the best options for you.