How much financial contribution should an MBO team provide?
MBO candidates typically need to make a substantial financial contribution to the deal, demonstrating their commitment and alignment with the venture.
While this contribution represents only a portion of the required funding, lenders expect the team to invest a significant sum, often called “hurt money.” This amount would be painful to lose and act as a financial incentive for the team to remain engaged in the business and work to overcome challenges rather than abandoning the endeavour.
Acceptable contribution levels vary among lenders and are influenced by the specific financial circumstances of each deal and MBO candidate. As a general guideline, MBO team members are typically expected to contribute roughly equivalent to 12 months’ salary.
It is common for management team members to fund their contributions by borrowing funds. Many lenders may be hesitant to proceed without a financial contribution, as it can be perceived as a lack of commitment.
In some instances, the management team may also be required to provide limited personal guarantees to the funders. For example, when using invoice discounting facilities, they might be asked to provide a fraud warranty.
It’s worth noting that the management team typically provides the smallest share of funding in the transaction but stands to gain the most significant financial rewards. This arrangement allows the management team to acquire their business, primarily financed with external funds. Repayment of these funds is derived from the profits generated by the company and any eventual sale, making the MBO an attractive option for management teams.