Things to Know About a Management Buyout and How to Fund It

YOU ARE HERE: :Home/Business/Things to Know About a Management Buyout and How to Fund It
  • Things to Know About a Management Buyout and How to Fund It

Things to Know About a Management Buyout and How to Fund It

A lot of people come to a point in their career when they feel that working for the proverbial man just doesn’t do it for them anymore. It’s only natural. Once you have enough experience, it feels like a waste to continue working for someone else, instead of building your own company. In a lot of cases, the best solution is a management buyout. A management buyout is when the management team of a company buys it from the owners. This makes a lot of sense, because instead of building a new business from scratch, they get to invest in an already established and successful company. And most importantly, it’s a company that they know how to run. But there is often one problem: where can you get the financing for your buyout? Here are some ways to gather the necessary funds.

A Bank Loan

Bank loans are not easy to get, but if you can get one, it is an excellent way to finance a buyout. In order to be eligible for a loan, it’s important to get your commercial credit score in order. As always, when looking at loans, it’s wise to shop around. Try to find the best possible deal. If the interest rate is so high it will eat up most of your new company’s profit, it might not be worth it. A loan can also be asset-based – that is, based on equipment, inventory and the company’s accounts.

Private Equity

A lot of management teams planning a buyout opt to secure the funds from a private equity company. This is usually the finance method of choice if you are unable to get a loan. In return for getting an injection of private capital, the investors will typically expect to get the company’s shares. It is, therefore, crucial to make sure the management team and the investors are on the same page regarding the vision of the company’s future direction. The investors typically aim to stay in the company for only a few years, during which they will maximize their profit.

Vendor financing

Unsurprisingly, your vendors can help you out in a buyout. They might be able to provide better terms of sales then they previously did. Getting better terms depends on your negotiation skills. Unlike a bank loan or other funding means, they come without an interest rate, so securing them is well worth the effort.

Seller Deferred Consideration

Seller deferred consideration means that the seller agrees to receive some of the funds at a later date. Again, to secure this kind of deal, your negotiation skills must come into play. Without the pressure to come up with all the money up front, you can make a plan on how to generate cash subsequently. Don’t forget to negotiate whether the subsequent payment is to be made in a lump sum, or in installments.

Things to Know About a Management Buyout and How to Fund It

Management Team Equity

Putting forth the management team’s personal funding is a risky move. On the one hand, you are avoiding debt, which is always a good thing. However, selling your property, getting a mortgage, or investing your life savings into a buyout carries a lot of pressure and a significant amount of risk for your personal finances. Sometimes, however, this move is unavoidable as there is just no way to gather all the funds in other ways.

A management buyout is a big and serious undertaking. It is, therefore, essential to think it through and act with caution. That way, you can find an optimal way to finance it and ensure the bright future of your company.

Dan Radak is a marketing professional with ten years of experience. He is a coauthor on several websites and regular contributor to BizzMark Blog. Currently, he is working with a number of companies in the field of digital marketing, closely collaborating with a couple of e-commerce companies.

Leave A Comment