MBI, MBO or Business Acquisition: Considerations and funding options available
How to Finance a Management Buy-In, Management Buy-Out or Business Acquisition
Buying an established business can be one of the fastest and effective ways to achieve growth. Whether you are an existing management team looking to take ownership through a Management Buy-Out (MBO), an external team pursuing a Management Buy-In (MBI), or an exisiting business owner looking to acquire an SME, understanding both the acquisition process and funding requirements is essential.
Securing the right finance can make the difference between a successful transaction and a missed opportunity. This blog explores the key considerations, funding options, and common challenges involved in completing a business acquisition.
What is a Management Buy-Out (MBO)?
A Management Buy-Out occurs when the existing management team purchases the business from its current owners.
This is one of the most common succession strategies for owner-managed businesses, particularly if:
- The current owner wishes to retire.
- There is no family succession plan.
- Private equity is not the preferred exit.
- The management team already has a proven track record.
What is a Management Buy-In (MBI)?
A Management Buy-In involves an external management team purchasing and taking control of an existing business.
Unlike an MBO, the buyers typically have no prior involvement with the company but bring sector expertise, leadership experience and a strategic vision for future growth.
Lenders will often place greater emphasis on:
- Industry experience
- Previous business ownership
- Financial track record
- Strength of the acquisition plan
- Post-acquisition strategy
Buying an Existing SME
Acquiring an established trading business can often provide greater advantages than starting a business from scratch.
These benefits could include:
- Immediate revenue
- Access to an existing customer base
- Experienced employees
- Existing supplier relationships
- An established brand reputation
- Proven operating systems
- Existing cash flow
However, purchasing a business also involves considerable financial commitment and is not without commercial risk.
It is vital you understand what you are buying and how you intend to finance the purchase.
Get to know the business before you buy it
Before even thinking about approaching lenders or investors, buyers should undertake detailed due diligence across these important areas.
Financial Performance
Review at least three years of:
- Statutory accounts
- Management accounts
- Cash flow
- EBITDA
- Gross margins
- Working capital
- Tax position
Cash Flow
Understand the business’s everyday working capital requirements.
Review:
- How quickly do customers pay?
- Are supplier terms changing?
- Does the business experience seasonal peaks and troughs?
- Will additional cash be needed post completion?
Supplier Risk
Assess whether:
- Suppliers have long-term agreements.
- Prices are stable.
- Alternative suppliers exist.
- How any supply chain disruption could affect profitability.
Management Team
For both MBIs and MBOs, lenders will carefully assess the leadership team.
Questions asked could include:
- Who will run the business?
- Does the team have the necessary commercial experience?
- Which if any key members of staff will be staying with the business?
- Is there a succession plan?
Legal Due Diligence
Professional legal advisers should review:
- Share purchase agreements
- Asset purchase agreements
- Employment contracts
- Property leases
- Intellectual property
- Commercial contracts
- Any regulatory obligations that need to be adhered to
Funding Options for MBOs, MBIs and Acquisitions
There isn’t a single funding solution which will suit every acquisition. Many successful transactions combine multiple funding sources.
Acquisition Finance
Acquisition finance is specifically designed to support business purchases.
- Share purchases
- Asset purchases
- Partial buyouts
- Full acquisitions
- Growth through acquisition
Asset-Based Lending
Asset-based lenders provide finance secured against business assets, including:
- Debtors
- Inventory
- Plant and machinery
- Commercial property
This can increase available funding without relying solely on cash flow.
Invoice Finance
Following completion, invoice finance can improve working capital by releasing cash tied up in unpaid invoices.
This can be particularly valuable for businesses experiencing rapid growth after the acquisition has completed.
Undertaking the purchasing of an exisiting business won’t be straightforward, it is important that you have the correct advisors to help you through all aspects of the transaction. Whilst it can be prove to be a difficult process, aquiring a new business could prove to be a valuable tool in assisting your growth ambitions.