The major issue concerning management teams at this stage is how they are going to afford to acquire an established business themselves. It is important to note however, that the MBO team will only be required to input a relatively small portion of the overall consideration. The main reason you are asked to put your own capital in initially is to show your commitment to the deal. This is a commonly known as “hurt money”.
The remaining consideration often comprises bank debt in one form or another. It is one of the cheapest forms of financing but requires repaying prior to any other financial provider and will have strict terms attached.
Deferred consideration may also be introduced. This is effectively where the exiting shareholders lend back to the company a proportion of the consideration for a period.
Venture capital (“VC”) funding is another common option (usually alongside bank funding) for financing the purchase price. A VC will assist companies by injecting cash in return for an equity stake. They have a mid-term plan of typically 3 – 5 years where they aim to increase the value of their stake (as well as yours) and ultimately exit through a number of possible routes. They will usually appoint a member of their team to your board to assist in decision making and strategic direction. They do not however take any direct part in the day to day running of the business.
In order to obtain funding from financial institutions you must have a detailed and well thought through business plan for success.
To measure this, funders will invariably focus on three key criteria:
- A strong and well-balanced management team;
- A commercially viable existing business; and
- A sound and developed strategy for the future.
All of the above areas need to be presented to chosen financiers in the correct manner through both the business plan and effective meetings with funders.