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Management buyouts can be expensive and require significant funding.

Management teams often don’t have the capital themselves to cover these costs, so have to look at other ways to finance this.

What is a management buyout?

A management buyout can be a useful option for both management teams that want to buy a business and the business owner wanting to sell. As the internal management team will know the business well, this is usually the smoothest way to easily transfer ownership of a business into new hands.

However, buying a business is very costly and raising funds can be difficult. Therefore, financing a management buyout often requires finding funds from different sources such as loans.

What finances can you use?

Deciding on the right types of finance to use when performing a management buyout can be a challenge. Here are a few options that could help you along the way when buying a business.

Management equity
Each member of the management team should be able to make some sort of financial contribution to the buyout. This could be from savings, property, or the sale of assets and stocks. Although this amount won’t be much in the grand scheme of things due to the majority coming from a third-party funder, it shows each member of management the willingness that they have. This shows that the team is committed to helping the business grow and expand.

Bank loans
A bank loan is often the first thought when management teams are looking to buyout their business. This can help those involved retain some equity as the loan agreement will be repaid over an agreed amount of time. These repayments will come with interest however, so its important that the business will be able to generate enough revenue to offset this.

Seller financing
The seller of the business might choose to help the management buyout along its way by deferring some of the price to be paid off later. This is like a loan where the additional amount is paid off over an agreed amount of time. This reduces the amount of capital needed by the management teams to buy and provides the seller with a quick and easy sale as well as a steady amount of money coming in afterwards.

Specialised lenders

There are circumstances where you could reach out to a specialised lender and be provided with enough funds to buy the business. Typically, these organisations will work with small businesses rather than large ones. These loans will usually be subject to higher interest rates too.

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