Many business owners are considering their future business plans and how to structure their successful exits as they get close to retirement.

Management buyouts (MBOs) can be an attractive option to both the management team looking to buy a business and the owner wishing to sell it. As a management team already knows the business well, MBOs are usually the smoothest type of succession and can offer a quicker, easier completion.

Raising finance is a key part of the process. MBOs can require significant funding, and management teams rarely have enough capital themselves to cover the total amount. Therefore, financing an MBO usually involves pooling together funding from several sources - both personal and external, and usually a mixture of debts (loans) and equity.

Lock Finance MBO template

While a complete buyout is often preferred, it only happens 30% of the time. For many, there is a gradual wind-down, as the business turnover is used to fund the shareholder's exit.

Buy out contracts can fail when parties don’t agree on the wind-down period and pace. Two things influence these factors:

  • Higher initial investment
  • Faster cash flow to accelerate the payout

Shorter wind-down periods benefit both parties, by transferring effective control faster. This means the new owner can make strategic changes without needing the exiting shareholder to agree.

A large Accounting practice was facing just this issue. How to help their client sell their shareholding to a minority shareholder? The advisory board believed this could be achieved with a well-structured finance package. This required:

  • some fixed asset lending to release equity in the business and
  • a mechanism to increase working capital to support the buyout.

The minority shareholder’s bank was only willing to provide some additional fixed asset lending.

The accounting practice invited Lock Finance to work with the advisory board to see if we could help. We assessed the strengths of the business, the industry and the capabilities of the parties involved. Our analysis showed how a structured, highly leveraged funding solution could allow the transaction to proceed.

Our solution involved two parts - a working capital facility and an unsecured term loan.

The $300k unsecured term loan increased the minority shareholder buyout offer, locking in the deal. The working capital solution gave the new owner financial capacity to accelerate growth without requiring personal guarantees.

For the accounting practice, our ability to offer an unsecured term loan as part of a buyout has created a new template to help business owners successfully transition out of their businesses.

If you would like to hear more about this funding solution, please get in touch with Craig either via email or mobile 027 476 4297.