MBO candidates usually need to make a significant financial contribution, showing their commitment to the venture.
Though this is only part of the funding, lenders expect the team to invest a notable amount, often called “hurt money.” This amount should be impactful enough that losing it would be painful, motivating the team to stay engaged and tackle challenges instead of abandoning the effort.
Acceptable contribution levels vary among lenders and depend on each deal’s financial specifics and the candidate’s situation. Generally, MBO team members are expected to contribute the equivalent of 12 months’ salary.
Management team members often borrow to fund their contributions. Many lenders may be reluctant to proceed without this financial input, viewing it as essential to demonstrate commitment.
In some cases, the management team may also need to provide limited personal guarantees to funders. For instance, when using invoice discounting facilities, they might offer a fraud warranty.
Notably, the management team typically contributes the smallest funding share in the deal. However, they stand to gain the highest financial rewards. This structure enables the management team to acquire their business mainly through external financing. Repayment of these funds comes from company profits and any future sale, making the MBO an appealing option.
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