YOUR COMPANY IS LOOKING FOR BUYOUT FINANCING!
FUNDING YOUR ' MANAGEMENT BUYOUT MBO '
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Oakville, Ontario
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MANAGEMENT BUYOUT FUNDING SOLUTIONS
The management buyout. They have been going on for a very long time in business. In its simplest form you are acquiring the company for which you are a current employee or perhaps a minority owner.
How then does this financing technique work and how do you make a mgmt buy out financing seem like a deft James Bond maneuver? Management teams rarely have all the cash and personal resources they need to complete a business acquisition and they want to understand management buyout pros and cons - as well as management buyout tax considerations. Let's dig in.
WHY MANAGEMENT BUYOUTS?
Motivations for buyouts differ but typical owners of a family business, as sellers, are looking to retire and desire a current management team to run and grow the business,
What do the owners of a business want? It's not just about money and the purchase price. Many owners are motivated by the desire to earn the rewards and deserve what is fair compensation for years of hard work and capital they have put into a business's success.
The management team and partial owners consider the strategy for a wide variety of reasons - for a starter they know the business they manage! They just need help with the resources and the right financial partners they require and that's what 7 Park Avenue Financial does! Management usually knows they have the ideas and expertise to grow the business to a new level around the company's performance.
Practically speaking managers and current partial owners know the company, and its potential, referring mostly of course to the financial potential of future profits. Current owners often want to see the legacy of their company continue, as well as address employee issues and needs.
WHAT OPTIONS ARE AVAILABLE FOR BUYOUT FINANCING - WHAT IS THE BEST MANAGEMENT BUYOUT FINANCING STRUCTURE?
Numerous financing vehicles are available to properly execute a buyout and business purchase via a detailed financial analysis and proper due diligence. To ensure the company can be sustainable and profitable a detailed financial analysis should be conducted.
They include debt options, external private equity firms, as well as monetizing the assets of the company to a degree that still allows it to remain hopefully profitable, cash flow positive and without an onerous debt load.
We're mostly talking here about private transactions. Publicly listed companies can of course be acquired in much the same manner - but that’s a different kettle of fish for another day.
There are some solid tax advantages for a management buy-out, and obviously, the appeal to the current owners is that they have finally reached the ' liquidity event ' they had envisioned.
While private equity firms offer equity financing and low-interest rate environments dominate a lot of transactions it’s really the strong growth or turnaround prospects that drive a lot of ' MBO ' (management buyout) deals in Canada. And when you have good managers and new committed owners all sorts of great financial results are possible.
THE RIGHT MIX OF DEBT FINANCING AND DEBT / EQUITY IS REQUIRED
Great financial results happen when management teams have a proper mix of debt and equity investment in the final transaction, providing a solid long term solution. It's really the same concept as a home mortgage, where we as homeowners manage our personal financial situation properly when our homes have the right amount of equity as well as the right debt/interest rate on our homes.
Debt however is the proverbial two-edged sword. Using other people's money has a lot of upsides, as well as... you guessed it, downside! When using a lot of debt to finance a transaction the risk of default on a deal rises significantly.
However, with properly structured debt owners can realize the benefits of downsizing, cutting costs, investing in new fixed assets, and growing the base of existing customers.
The business has to have the ability and potential to generate cash flows for short-term and long term success while providing an adequate return to the buyer and supporting ongoing business capital investments.
CONSIDER ALTERNATIVE FINANCING SOLUTIONS WHEN PURCHASING A BUSINESS
Management buyouts can be financed by non-bank asset-based lending/asset finance facilities, Canadian chartered bank term loans and revolving credits, and even unsecured debt in the form of mezzanine financing and subordinated -debt cash flow loans where a company's cash flow is key in a mezzanine debt scenario around the projected company's operations via the unsecured lending.
Small transactions in Canada can even be fully financed via the SBL Govt business loan for small businesses which requires no personal assets to be collateralized with the loan taking a senior debt position. If the business fails no personal assets are are a risk.
MANAGEMENT BUYOUT VS LEVERAGED BUYOUT?
The potential business owner might consider a leveraged buyout from an asset-based lender on the company's assets. A leveraged management buyout still nonetheless requires some new owner equity.
Large transactions might benefit from the partnership of a private equity firm - although private equity funds will often take a substantial ownership position while the management team takes a lesser ownership position.
UNDERSTANDING THE MANAGEMENT BUYOUT PROCESS
All of the above financing vehicles have different levels of risk and structure. It goes hopefully without saying (we’ll say it anyway!) that a part of your transaction must include your own owner equity component...
Deals on management buy-outs can be simple or complex - depending more often than not on the size of the deal. Key issues include secured assets, repayment terms, equity components, and cash flow coverage. Those components allow business owners to grow the business.
SELLER FINANCING MAKES A DEAL HAPPEN
To ensure that the company is incentivized to grow, it's common practice for owners/vendors of a business looking into retirement or wanting out entirely with their assets to do so by funding part of a buyout.
Don't forget also that often the current owner’s willingness to help finance the buyout via a partial vendor take back ' VTB' can often make a deal happen more quickly and successfully.
CONCLUSION
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in developing a management buyout checklist via 7 Park Avenue Financial management buy out strategy that reaps advantages and minimizes risk to all parties.
FAQ: FREQUENTLY ASKED QUESTIONS/PEOPLE ALSO ASK / MORE INFORMATION
What is a management buyout? How are they financed?
In management buyouts an existing management team pools resources to acquire all or majority ownership stake of a business that they currently manage via an employee buyout based on an agreed upon transaction value- typically in private businesses. Financing under this type of transacion has the incumbent managmeent team arranging financing via personal invesment, and bank and other commercial financing sources such as alternative lenders based on an independent valuaiton of a company.
