How can I finance a management buy-out without giving away a seat on the board?

I work for a family-run furniture maker in the West Midlands where the last family member is retiring as chief executive. I am considering a management buy-out and have spoken with venture capitalists; however, we’re not keen to hand over a seat on the board in return for fi nancial backing. What are the alternatives?


A. David Robertson of Bibby Financial Services writes:

Selecting the right finance is one of the most important stages in any management buy-out (MBO). Without appropriate funding in place, you will not only struggle to complete the MBO, but the prosperity of your business once you’ve taken control may also suffer.

So what are the options? While venture capital is most commonly associated with MBOs, there are pitfalls with this option. Many management teams are fi rmly against handing over a slice of their business to outside investors. In fact, many conventional forms of funding favoured by management teams prove to be less favourable with the new owners, or unsuitable altogether.

Overdrafts, for example, are really designed for short periods of funding, such as a temporary cash shortage. Another alternative is a longer-term loan. This is viable if you know you are unlikely to be able to repay money you want to raise in the short-term. But be cautious, as banks’ terms vary. Decide over how long you wish to borrow, the rate of interest and whether it is fi xed or variable, before making a longterm commitment.

You may even consider using your own personal equity. The main advantage is you will not be indebted to another organisation and may act as you see fit. But this is also risky, and if the business fails, it can leave you out of pocket or worse – personally bankrupt.

These drawbacks help explain why alternatives, such as invoice finance, are increasingly used not just as a form of working capital but as tools to support an MBO.

Invoice finance allows the buy-out team to raise funds based on the amount owed by its customers, releasing up to 85% of the value of your outstanding invoices. It can also bridge the gap between what you can afford and what the bank will lend, avoiding the need to invest personal equity.

Packaged lend solutions also enable owners and managers to secure funding against a variety of business assets, including book debts, stock, plant and machinery, and property, tailoring a package to meet your specific MBO requirements.

MBOs are never easy, but with the right financial support and expert advice, it can be hugely satisfying and a great opportunity to take ownership of an established business and see it thrive and succeed.

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