Thousands of individuals dream of owning their own business one day, and for those that have worked hard to climb the ladder to management at an existing company, it can seem like an impossible task to ever own their own company.
Managers will often have spent many years of hard work to get to where they are in their career and leaving that to start a business of their own can seem like starting over again. Management Buyouts can provide an excellent solution to this problem and are one of the most popular and financially rewarding ways of running a business.
With a Management Buyout, you will not have the hassle of building a new company from the ground up, and you can become the owner of a business that you are already experienced within. This guide covers everything you need to know about Management Buyouts, as well as some handy tips from our experts.
What is a Management Buyout?
A Management Buyout is a financial deal whereby the manager of a company can purchase the business that they work for from the existing owner, with the help of financial backing. In most cases, the money used to buy the business is fronted by a combination of banks and other lenders such as equity groups.
Banks will provide loans, overdraft finance or other forms of funding where necessary, and all these types of finance are relatively cheap options. Equity groups will usually provide equity finance which will come at a more significant risk, and in turn, they will expect a more substantial return. In some cases, the vendor that is selling the business might also provide some finance themselves.
Management Buyout is a popular option for many managers as it offers far greater rewards. It is likely that you will be financially better off as the business owner as opposed to an employee.
How does Management Buyout work?
For large corporations that are looking to sell divisions of their company that don’t make up part of their main business, Management Buyouts are popular exit strategies. It is also a good choice for private business owners who are looking to retire and sell their company.
In most cases, a Management Buyout is a substantial financial transaction that is funded by a combination of debt and equity from various lenders and financiers. It may be either a lone manager or a management team, that pool together resources in order to purchase all or a proportion of a business they are currently managing.
Most managers will need to source some kind of funding for a Management Buyout, as it is unlikely they will have the funds readily available themselves. However, they will be required to buy at least part of the business outright themselves, and then use other borrowing options to finance the remainder.
Acquiring a company using Management Buyout can put a lot of pressure on investors and the management team. They will need to not only manage the company’s day to day operations but also work on repaying the debt plus interest.
While being a business owner can be more beneficial financially, it also means you have to take on all the responsibilities of being a business owner as opposed to just an employee. You will be committed to that business, so it must be a long term strategy for you.
What are the funding options for Management Buyouts?
Many managers who want to go ahead with a Management Buyout struggle to find lenders for the transaction. A huge capital investment is needed for Management Buyouts, and this funding is usually found through a collection of sources:
- Management Team: It is not likely that the management team buying the business will be able to pay for the Management Buyout themselves. However, they must provide a share of the capital themselves.
- Bank Loans: A proportion of a Management Buyout is usually funded using a bank loan. Many banks will be hesitant to lend too much especially if the business is seen as too risky. If the business can be approved for a bank loan, then it makes for a relatively easy and hassle-free way to fund some of the purchase, although repayment terms may be strict.
- Equity Groups: Usually used alongside bank lending, venture capital and private equity loans are another popular funding choice. They require a stake in the equity which might not be ideal for the manager as it will give the equity group a stake in the business decision making.
Never rush into a Management Buyout. Although the idea of owning your own business can be exciting, it takes proper planning and time to complete a Management Buyout successfully.