Frothy private equity markets and the desperate need of financial and strategic financiers/acquirers to identify and incentive-ize quality management partners have combined to create a heightened interest in management buyouts (MBOs). An MBO is a form of leveraged buyout (LBO) used to transfer all or part of the ownership of a company to the individuals with the primary operational responsibilities for the enterprise. Both debt and equity investors are particularly interested in financing MBO because of the three "I's":
- Information. The managers running a business understand the operational and marketing processes and relationships to a depth and degree inaccessible to outsiders. An ownership structure where the key managers have meaningful equity stakes can be the catalyst that "unlocks" this information and accelerates company growth. On the cost side, an MBO often reduces the need for the costly supervisory and monitoring systems that typify absentee-owned businesses.
- Incentive. It is entrepreneurial common sense that individuals work harder and more creatively and efficiently when a portion of their own capital is at risk, and when the rewards for success are material.
- Intangibles. Often, both the seller and the management team have a sympathetic interest in seeing a management buyout take place. In successful companies, the seller and the management team usually have long and amicable track records of working together - an MBO can normally be structured to address the needs of both parties after its closing.
Management Buyout Financing in Today's Environment Management buyouts are financed through a combination of senior debt, subordinated debt, and equity. The key to bringing an MBO to fruition is to structure a transaction that addresses the concerns and objectives of each investor group.
- Senior Debt. 35% to 70% of an MBO's financing normally takes the form of senior financing - either a revolver secured by accounts receivable, inventory, and/or a term loan based on a certain percentage of the fair market value of the company's fixed assets (land, buildings, equipment, etc.).
- Subordinated Debt. Approximately 15% to 30% of an MBO financing is in the form of subordinated debt. Sources of subordinated debt include mezzanine funds, strategic and institutional investors. In transactions under $100 million, it is often carried by the seller.
- Equity. From 10% to 50% of an MBO financing is in the form of equity. The purchasing management normally invests in the equity of an MBO alongside private equity funds, strategic and institutional investors, and/or high net worth individuals. The seller and the subordinated lenders frequently receive a minority position in the new company.
Value of an Intermediary in the MBO Process In the management buyout process, a competent intermediary can:
- Ease the natural friction between buying management and seller. It is difficult to negotiate with people you know well and will be working with post-sale.
- Arrange all aspects of the financing (equity, subordinated debt, senior debt, etc.).
- Provide professional valuation advice.
- Continue to provide acquisition and financial advice post-sale.
If you are connected with a company that may be a candidate for a management buyout, or one that requires capital and/or is interested in selling all or part of their business, we encourage you to contact us at 800-506-5728 or at [email protected] for a completely confidential review.