Financing management buyouts requires a certain amount of strategy and knowledge of how to leverage a company’s current and long-term assets. Business Finance Solutions has experience using a variety of financing methods for assisting management of small business land lower middle-market companies successfully acquire their businesses.

Financing Management Buyouts for Small Businesses

For businesses with annual gross revenues less than $5 million, financing small business management buyouts can be more challenging than much larger companies. Private equity is generally not available at for that small sized business, but other more traditional financing methods are.

Using a small capital stack of the management’s personal resources, bank or commercial debt, and a small amount of owner financing is all that is necessary to effect the ownership change. The key to a safe, cost effective management buyout is having at least 20% of the total cost of the buyout in cash between the management team members available for the purchase. When less cash is available for initial equity, it may be necessary to use commercial asset-based finance methods rather than bank financing. For example, if the sale price is $2.5 million, having $500,000 in cash to inject into the total purchase price will greatly enhance chances for traditional bank debt. If 20% of the total transaction isn’t available in cash, leveraging substantial assets like machinery, real estate, and large equipment can be used to collateralize a commercial finance loan.

Financing Management Buyouts for Lower-Middle Market Companies

Wholesale distributors that have substantial amounts of inventory can often use the value of the inventory and accounts receivable to finance management buyouts

Wholesale distributors that have substantial amounts of inventory can often use the value of the inventory and accounts receivable as collateral to finance management buyouts

Companies that have between $5 million and $50 million in annual revenues are the sweet spot for financing management buyouts. Companies of this size are big enough to get the attention of SBICs and private equity funds that are interested in investing in companies that can grow to the next level with the right management team.

Like small businesses, having some personal cash assets to use for the management buyout will help keep the amount of equity given to the financing source to a minimum. In the last few years, though, some private equity funds have begun employing a strategy to “waterfall” their equity stake downwards as they earn back their investment. It isn’t unusual in today’s financing environment to have a transaction where the private equity fund may start year one with 60% to 80% of the company’s capital, but by year five, have no stake in the enterprise. The more EBITDA the company has in the two years before the beginning of the buyout, into the management buyout; the less initial investment the private equity fund is likely to require.

Structuring The Management Buyout Financing Method

Since most management teams that begin a management buyout don’t have prior experience engaging in management buyouts, it pays to engage a team dedicated to assist the acquisition team structure the transaction with the lowest risk and highest chance of reward. Business Finance Solutions has been using multiple types of company assets assisting management teams in buying out their employer. In nearly all cases, our fee is recovered in reduced costs and less risk to the buyout group.

Write or call Sam Thacker at 512.990.8756 today to discuss your company’s management buyout opportunity.