Financing a Management Buyout – 4 Key Strategies

Saturday, March 11, 2017, 6:00 AM | Leave Comment

Business growth can take a company in many different directions. They can vary from attracting new investments to overtaking other enterprises or merging with companies of similar size and value.

Apart from that, a business enterprise can undergo some ground-breaking changes from the inside.

In some cases, company owners can decide to retire or start working on more challenging projects. The most viable option for those companies is to be overtaken by their managers.

However, their joint budget might not suffice for buying out that very company.

This is where the following options for obtaining cash can come in handy.

Financing a Management Buyout – 4 Key Strategies2

  1. Managers’ assets

    If you’re a member of the trust of managers who are preparing to perform a management buyout (MBO), you should know that each of you needs to have their own assets.

    When you start negotiating with an investor or a lender, they’ll want to see what personal assets you’re investing in that buyout.

    For instance, if you raise a second mortgage on your house, it will show your potential investors that you believe in that project.

    The more assets managers you put at stake, the better chances they’ll have to gain investors’ trust.

    Simply put, if you’re ready to take the risk, why wouldn’t they lend you money and make some from interest rates, as well?

  2. Sellers’ contributions

    A situation in which managers buy out a business from their owners doesn’t have to be caused by any misunderstanding or problems.

    On the contrary, such transactions often happen for the benefit of all interested parties. In line with that, it’s not unusual that previous owners partly finance the buyout.

    Such a deal generates three-fold benefits.

    • Firstly, managers can borrow money at affordable rates, from a reliable lender.

    • Secondly, if owners are willing to participate in this operation, it’s a sign that the business in question is a healthy enterprise.

    • Finally, other lenders will find this act a solid proof that they should also invest their assets here, as well.

  3. Multitude of suppliers

    Whether you’re asking for a loan from a bank or you decide to consider private capital, the company will look better if it has a large number of associates and suppliers.

    Since you can’t acquire dozens of partners in a few months’ time without looking suspicious, you should constantly work on expanding your network of suppliers.

    What’s more, make sure all of them are always paid on time for their products. By doing so, you’ll will build a fine reputation for your company and ensure a long-term collaboration with your suppliers.

    Having a wide range of suppliers will also show that your company is on a roll. In return, this will convince your potential lenders that you’re a reliable business.

  4. Paying the creditors

    When business owners and managers start thinking about an MBO, they should adopt a set of proactive measures.

    First of all, they need to sort out the finances, in order to give them a facelift for potential investors and lenders.

    In line with that, it’s imperative to consolidate your business debt.

    If you don’t deal with the skeletons in your closet, they’ll harm your MBO-operation.

    For instance, a lender might suggest to support you financially by taking over some of your debts, so that they become shareholders of the company in question. It could generate a completely new situation for managers.

    It’s highly likely you wouldn’t approve of having new forces on board (of new directors).

    Therefore, pay your creditors first and then begin with the MBO-procedure.

A management buyout is often a result of an agreement between owners and managers. All parties can benefit from it, without having to invest too many assets.

Nevertheless, if the managers in question lack some money for that endeavor, they’ll have to come up with additional sources of financing.

Moreover, they want to stay the key players in that maneuver, so this phase requires detailed planning and smart moves.

The strategies from this article should help them take the reins of the company and keep up with the good work.

Author BIO

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.

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