MBO / MBI Finance
“MBO”, “MBI”, “VIMBO” what’s it all about? Aside from the jargon these can be really interesting deals that are transformative for the companies and individuals involved. We’ve put together some pointers for you on the key ideas below. The actual funding structure is usually a combination of an ABL facility and a Cashflow loan.
A Management Buy-Out is as it reads – there is some form of share purchase of the business by the incumbent management.
An example would be where a business owner (the vendor) has 100% of the shares of the business but for whatever reason wants to exit. Management don’t want a new external owner in charge, they believe they can run the business without the owner around and they definitely fancy the reward this might generate. So they decide to buy the shares from the owner and facilitate his/her exit.
Normally management put some “risk capital” into the deal so that the lender can see they have a vested interest in the success of the venture. This is raised typically from savings and/or mortgaging personal assets.
Some deals are structured on a full 100% of the monies to the vendor on day 1, but not many. It’s typical that the ABL facility is used to raise a good lump on day 1 with the rest of the payment deferred (deferred consideration) and paid in instalments over time, sometimes subject to certain factors. This can quite literally mean that the buyers haven’t had to put any of their own money in and the business has financed their purchase through the ongoing trading performance – this does happen frequently. Other times the payment has a ratchet so that if the business does particularly well, the vendor shares in the upside.
Lenders will normally support MBOs if the candidates and plans are credible, however there needs to be a good story about the team being able to run the business. Lenders will want to ascertain that the key clients are not just dealing with the business because of the existing owner, and that the existing owner does not hold some key information in their head without which the business won’t function.
Some MBOs are structured so that the exit is phased, this can be sensible for all involved.
A Management Buy-In is where an individual or team external to the business wants to buy a controlling stake of a company and replace the existing management. On the one hand maybe the external team know the market better or they have a better skills set, on the other they may not fully appreciate how the business runs and they can quickly get into hot water.
You are much more likely to flounder with an MBI than an MBO, you just don’t know how bad a business is until you have spent time in it for a period.
No due diligence will uncover everything and the thing is, if the business assets have been leveraged to achieve the MBI there might be little prospect of raising further cash when it is needed.
We have seen some spectacularly unsuccessful MBIs where “what’s required” has been totally underestimated by the entrant for instance:
- the effort in the marketplace required to restore faith in a company that has under-performed and has a tarnished brand,
- the potentially insurmountable problem of changing culture in a business
- the realisation that the cost savings envisaged just cannot be realised.
- the realisation that the competitors have invested a lot more in the machinery to produce your goods and that without a similar investment you are unable to manufacture at the new market price.
The better MBIs are where the candidates have been working in the business as consultants or embedded candidates for a good while – 6 months at least, so it becomes more like an MBO.
Similar to the MBO is the VIMBO or “Vendor Initiated Management Buy-Out” where the owner decides they want out and proactively gets the finance and financial structure lined up to facilitate their exit.
This is a proactive stance that “makes it happen” rather than hope that the management team will a) be able to come up with a compelling structure and b) come up with the amount the vendor wants and c) gets on with it.
In this sort of structure it would definitely be wise for the owner to stick around and help the management team adjust to their new responsibilities, after all the vendor normally has a vested interest because the business will need to perform to release the deferred consideration.
We have a lot of experience with MBOs, MBIs and BIMBOs (a hybrid of both) and sometimes it’s well worth chatting something through just to see if passes the “does this make sense test” before you put your house on the line.
We have even seen MBI’s that have failed and then the previous owners have initiated an MBI and regained control of the business at a significant discount, improved it back to how it was and then sold it again. Very impressive.
Our team has a lot of experience, we have been around the block and are well placed to help you.
Why not get in touch with us here and we can start the conversation.