Are You Ready To Ace Buyout Financing ?

OVERVIEW – Information on successful management buyout strategies . How does the mgmt buy out work best?

Management Buyout . It’s been going on for a very long time in business. In effect you are acquiring the company for which you are a current employee or perhaps minority owner.

How then does this financing technique work and how you make a Mgmt buy out seem like a deft James Bond maneuver? Let’s dig in.

Managers and partial owners consider the strategy for a wide variety of reasons. Practically speaking managers and current partial owners know the company, and its potential, referring mostly of course to the financial potential of future profits. Current owners often want to see the legacy of their company continue, as well as addressing employee issues and needs.

Numerous financing vehicles are available to properly execute a buyout. They include debt options, external private equity , as well as monetizing the assets of the company to a degree that still allows it to remain hopefully profitable , cash flow positive and without an onerous debt load.

We’re mostly talking here about private transactions. Publicly listed companies can of course be acquired in much the same manner – but that’s a different kettle of fish for another day.

There are some solid tax advantages for a management buy out, and obviously the appeal to the current owners is that they have finally reached the ‘ liquidity event ‘ they had envisioned. While private equity firms and low interest rate environments dominate a lot of transactions it’s really the strong growth or turnaround prospects that drive a lot of ‘ MBO ‘ (management buyout) deals in Canada. And when you have good managers and new committed owners all sorts of great financial results are possible.

Great financial results happen when you have a proper mix of debt and equity in the final transaction. It’s really the same concept as a home mortgage, where we as home owner’s manager our personal financial situation properly when our homes have the right amount of equity as well as the right debt / interest rate on our homes.

Debt however is the proverbial two edged sword.

Using other peoples money has a lot of upside, as well as… you guessed it, downside! When using a lot of debt to finance a transaction the risk of default on a deal rises significantly. . However, with properly structured debt owners can realize the benefits of downsizing, cutting costs, investment in new fixed assets, etc.

Management buyouts can be financed by non bank asset based lending facilities, Canadian chartered bank term loans and revolving credits, and even unsecured debt in the form of mezzanine and sub debt cash flow loans. Small transactions in Canada can even be fully financed via the SBL Govt business loan.

All of the above financing vehicles have different levels of risk and structure. It goes hopefully without saying (we’ll say it anyway!) that a part of your transaction must include your own owner equity component… Deals on Mgmt buy outs can be simple or complex – depending more often than not on the size of the deal. Key issues include secured assets, repayment terms, equity components, and cash flow coverage.

Don’t forget also that often the current owner’s willingness to help finance the buyout via a partial vendor take back ‘ VTB’ can often make a deal happen more quickly and successfully.

Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in developing a management buy out strategy that reaps advantages and minimizes risk to all parties.

Author: Stan Prokop – founder of 7 Park Avenue Financial


7 Park Avenue Financial
905  302 4171
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