This is funding which has the advantage of not having to be repaid in the near future, therefore it is not a debt burden to the future trading performance of the business.
Generally. the more equity within a deal, the less the perceived risk to debt providers.
The management team will be expected to contribute equity funding to the deal. This will be funding from your own cash resources, from family or in many cases from borrowing against your own home.
The amount that can be raised in this way is usually only a proportion of the total funding requirement, but it is seen by lenders as the most important as this is “hurt money”. You are less likely to walk away in times of trouble if you are financially committed to a deal where it would financially hurt you to do so.
The minimum “expected” level of hurt money is typically 6 to 12 months’ worth of salary per team member. Obviously, the more that is available the better, as this will reduce debt requirement.
Involving Business Angels (wealthy Individuals seeking Investment opportunities) allows additional equity to be sourced for a Management Buy Out. However this will require the management team to part with some of the equity and share future ownership of the business in exchange for Equity to facilitate the deal. In some cases the “Business Angel” can be a wealthy family member willing to back the MBO team, but on different risk/reward terms.
Alternatively, we can actively source a suitable Business Angel from one of the many Business Angel networks we regularly deal with across the UK. The “right” Business Angel can also add experience , sector knowledge and contacts in addition to the cash, thereby providing added value.
There are many Venture Capital Funds (“VC”) actively seeking high growth potential investments.
However most VC’s will seek a relatively large equity stake (20%- 49%) and will seek an exit (This is where they get their return) in 4 to 5 years.
VC’s will only get their returns in high growth businesses, where shareholder value will increase significantly. In smaller family firms, this type of funding is not suitable for Management Buy Out’s
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