Buy Out's (MBO's & LBO's)
Owners of businesses can prefer a MBO to a trade sale (usually a competitor) for reasons of continuity, brand preservation and a feeling of wanting to look after existing staff. MBO’s can also rapidly become the only viable option if the nature of the business is so specialised that the retention of the incumbent management team is vital for the ongoing viability of the business. A well organised management offer to acquire the shares in a company can rapidly become the only viable exit option as other investors will be wary about entering into a process where the management team are part of a rival bid.
Management teams will generally not have sufficient capital to execute an MBO. Minimising the third party equity required will maximise the ownership of the management team and therefore if management are confident of the future performance of the company, Vendor Finance and MBO / LBO funders should be used to maximise ownership.
Vendor FinanceThis is the easiest and most logical funding source for a prospective MBO acquisition. It is essentially the deferral of a portion of the purchase price to a later date. It is important to structure this commitment correctly as certain conditions (registered charges, cash pay interest, amortisation and maturity dates) will make it difficult to attract additional debt facilities.
Acquisition FinanceDepending on the type of business, third party debt facilities can get as high as 3 to 4x EBITDA on a cashflow lend basis. In order to determine debt quantums, a detailed review of both the balance sheet (in particular aged receivable, net asset register and inventory list) and the historical and forecast cashflow will be required. Asset rich, stable earnings business will be able to attract far higher levels of leverage. Lenders will also look at the equity contribution being provided by both the management team and the implied equity buffer being provided by the Vendor finance note.
The providers of Acquisition Finance are the same pool of capital who support leveraged buy-outs with PE sponsors. For mid sized companies with debt funding requirements of A$5m to A$15m funding is typically provided by local credit funds and family office backed funds. For cheque sizes greater then A$15m there are pools of offshore capital. Domestic banks still play a role in this space and if the funding requirement is reasonably conservative and the individual directors have personal assets and are willing to provide directors guarantees then they will still represent the lowest cost funding source.
Case Study: Logistics MBO
A logistics company who has a strong and stable earnings history was looking to transition ownership to the current management team. The value of the Company was north of $20m at the time of the MBO. The Big 4 Australian banks were unwilling to provide funding for a share buyback in a context where there was no collateral to support the debt (assets were held via operating lease). The management team who were acquiring it had limited means of injecting further equity and did not want to put personal guarantees/ homes up in support.
The Neu Capital team worked with the management team to help them put together a package that was acceptable to the institutional exiting shareholder. This included a combination of specialised debt, convertible notes, and earn out provisions. The funding was provided by a non-bank lender that provided lending based on the Company’s cashflows.
Explore the Neu Capital lender network to see how our investor relationships can assist with your MBO or LBO opportunity.
The Neu Capital network of institutional lenders span several hundred Family Offices, Credit Funds, Pension Funds, Hedge Funds and Banks.