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What is management buyout finance?

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A management buyout is the purchase of a controlling share in a company from management. It is a form of acquisition where a shareholder or shareholder’s shares are purchased. It serves two purposes:

  1. It relinquishes company control to another party. This can be someone internal who influences the business corporately or an external investment business.
  2. It serves as a form of exit for management. Owner-managers in particular like to use management buy-outs to exit a business.

Buyouts happen for a number of reasons. Often, they are chosen as a way of selling a business to existing employees. Since these people are already involved with the company, the often-arduous process of finding a buyer doesn’t exist.

Management buyout finance

The most commonly cited drawback of a management buyout is that existing employees, even directors, often lack the financial power to pull it off. This is because the buyer has to effectively buy back shares held by other parties.

For this reason, management buyout finance exists.

Management buyout finance is a specialist financial product that can help existing stakeholders and shareholders perform a management buyout. It gives the buyer or buyers cash in the bank to perform the transaction required. This financial power is often all it takes to push a deal over the line. A lack of financial power can scupper a deal, so it’s important all buyers have a financial backer lined up to power the deal.

Using a lender to finance a management buyout

Borrowing the money to pull off a management buyout is normal in the world of investment. In our experience, the vast majority of management buyouts are funded by lenders. There are a few benefits to doing this:

  1. It provides all financing upfront. There are no drip-fed payments and no holdbacks. Cash is wired to a bank account within 48-hours.
  2. Lenders set out clear repayments. This is exactly the same as a business loan. You pay back the amount you owe on a monthly schedule.
  3. Borrowing money for a management buyout is affordable. Interest rates are extremely competitive in this market.

Funding a management buyout in this way can be done with two types of lender: Banks and independents. Both types of lender obtain their return on investment from the buyout by way of interest. The two key differences between them are their interest rates and the ease of which the funding can be obtained.

In both cases, independent lenders are typically superior. They offer lower entry interest rates and fixed interest rates over a number of years. This makes budgeting for repayments easy. Independent lenders also have a less complex decision process.

We can’t speak for all lenders, but at Nationwide Corporate Finance we review all applications individually. Because a human reviews the management buyout finance applications, we approve more than high-street banks. That’s because we’re able to see the potential in a buyout from an actual business sense. This is an important point of consideration when deciding who should fund your buyout.

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