A management buyout is a transaction where the company’s management team purchases the business.
It offers the advantage of smoothly transferring ownership of a business from its shareholders, (who may have become inactive within the business, or who are looking to realise the value of their hard work), to the day-to-day management team, who know the business well and are trusted by its customer base. In this way, it presents business continuity to key stakeholders and an equity incentive to management, which then helps drive the business along the next stage of its development.
An MBO can either be structured in conjunction with a third-party private equity (PE) provider, or on a ‘vendor-financed’ basis. A PE-sponsored deal will potentially generate the most funding for a day-one ‘cash out’ to the sellers, while diluting management’s shareholding. However, PE expertise in creating shareholder value is likely to be beneficial to the management team in the longer term. In a vendor-financed scenario, the seller will probably receive a lesser initial consideration, with the balance deferred and payable over an agreed period. The seller may also receive a higher valuation and the management team could potentially receive larger shareholdings.
Once a broad transaction has been agreed, there are two main ways in which the MBO can be funded;
- With an asset-based lending (ABL) facility, a lender will consider the widest picture possible of the company’s balance sheet to optimise the level of funding available. They will look to fully leverage the company’s assets (receivables, stock, plant & machinery and property), while potentially considering top-up cashflow loans to provide even greater financial headroom. In many cases this structure will feature a lower equity contribution from the management team, a lighter financial covenant structure and more flexibility around other key commercial terms.
- With a business term loan, which might historically have been provided by a company’s clearing bank, the lender will consider historic performance (problematic for businesses in sectors hard hit by Covid) and the plans and commitment of the management team to build the business over the long-term. However, in the lower mid-market, these facilities frequently require personal guarantees, as well as a significant personal investment in the company. Since a business loan comes with a level of funding and repayment structure that are both fixed for the duration, the facility does not offer the flexibility to expand as the business grows.
A successful MBO will align the interests of the buyers and sellers to minimise transaction risk and to ensure the continued success of the business. This is particularly important if the exit deal involves stage payments by way of deferred or contingent consideration, or for highly technical or niche businesses, where there may be fewer potential buyers or appropriately skilled management teams.
While there continues to be uncertainty around the future Capital Gains Tax regime for business vendors, MBOs will remain an attractive option for reasons of tax efficiency. The interest generated in Q1 2020, when Entrepreneur’s Relief reform was said to be under consideration has sparked a continuing boom in MBO transactions.
In most cases, MBOs can be conducted at greater speed than trade sales. Transactional asset-based lenders are used to working at pace, with diligence focussed on key areas and on critical asset values, meaning that the lender can provide the deal with greater certainty earlier in the process, while allowing the management team more time to continue to focus on day-to-day operations.
A significant advantage of ABL is that it has the potential to fund both the initial transaction consideration and the ongoing working capital requirements of the business as it grows.
The following case studies represent a selection of MBO deals completed by Arbuthnot Commercial Asset Based Lending (ABL) in the last six months:
- Arbuthnot Commercial ABL provides £5.5m facility to support the acquisition and growth of Bromborough Paints
- Arbuthnot Commercial ABL supports Wheelwright's MBO with finance facility to drive ambitious growth strategy
- Arbuthnot Commercial ABL backs MBO of Glossop Carton & Print with flexible funding facility
- Arbuthnot Commercial ABL backs MBO of MDS Civil Engineering with an all asset funding facility
- Arbuthnot Commercial ABL supports championship-winning Spirit Motorcycles’ acquisition of Talon Engineering
If you want to find out more about how we can help you achieve your business goals using the financing we provide, please do get in touch with one of our local representatives.
Please visit our dedicated business recovery hub for more information aimed at supporting your business and your teams, as you transition to a post-lockdown working environment.
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