Most MBO candidates do not have the financial resources to significantly contribute to the deal.
Whilst the amount they have available will often be a fraction of the overall transaction, nevertheless all lenders will expect them to contribute “hurt money”. (basically, a significant sum in relation to their personal circumstances).
Different lenders have different views on what is acceptable and each deal and each MBO candidate have different circumstances.
Some lenders would look for total a management contribution of up to 10% of the deal value. But the more accepted guideline would be 12 month worth of salary. This can vary between team members depending on relative equity stakes.
Basically, this buys the commitment of the management team to make the transaction work and fight if times get tough. With no contribution, there is no hurt, no incentive to fight and invariably no backers to a deal.
Have a financial puzzle? Let us find the solution