When considering an MBO, put the funding in place first

By Paul Taberner, investment director, Mercia Fund Managers.

With the baby boom generation reaching retirement, many business owners will look to sell in the coming years. For small firms, the most likely buyers may be managers already working in the business.

Selling to a management team has advantages for all concerned - people within the business are most likely to appreciate its true value, it gives them the chance to own their own firm, and it is more likely to secure the jobs of other staff.

However whether you are an owner or a manager, if you are planning a management buy-out (MBO), it pays to have the funding in place at an early stage.

Traditionally such deals have been funded by equity investment, which means that the investor will take a stake in the business and look to sell it in a few years’ time. The advantage is the management team will not have to make regular capital repayments, although they will not own the business outright and the investor will most likely want a say in how it is run.

However it is possible to secure loan funding for some or all of an MBO, an option many will prefer. Provided the company can demonstrate its ability to make scheduled repayments, there may be no need to release equity and eventually – once the owner has finally bowed out – the management team can own the business outright. Whichever you prefer, discussing the options with a funder at an early stage will ensure that your plans are on a firm footing.