MBO (management buy-out) refers to the transfer of the company to employees of the same. Experience shows that this mainly means selling the company to the existing management. The MBO plays an important role in company successions in small and medium-sized enterprises (SMEs).

Especially “grown” family businesses are often sold to the existing management. Family businesses in particular are often sold to the existing management due to a lack of suitable or willing successors from within the family. In this way, the continuity of the company and the continuity of its management are ensured. The advantage is that the management of the company is familiar with the structures of the business. This binding of the acting persons often facilitates the sales negotiations. Problems, on the other hand, often arise in the context of financing the purchase price, since potential buyers usually have a high need for external financing.

Managers must be convincing in a management buy-out

Experience shows that passion, commitment, authenticity and a certain willingness to take risks on the part of the previous management are decisive factors in whether a management buy-out can be successfully implemented. Because it depends on the power of persuasion and the developed strategy whether the financing of an MBO or the search for financiers can be successfully implemented. This is one of the biggest challenges of management buy-outs. The basic prerequisite for a successful MBO is sufficient financial resources for the company and stable corporate development.

Financing options for future management

In contrast to the classic sale of a company, in which third parties act as buyers, in a management buy-out the previous management buys the shares. Good advice is therefore needed in order to set up sustainable financing. The need to raise additional equity arises from the fact that the acquiring management usually does not have the necessary equity to fully finance the purchase price. The previous shareholders of the company, banks, investment companies or family offices often step in to close the financing gap. The interest rates for such equity-strengthening financing are often higher than for a normal bank loan. In the financing mix, such a component usually helps to obtain a classic bank loan.

The pillars of solid financing

Provided that the former shareholders are willing to take a high risk, the entrepreneurial loan is the simplest type of financing. The instalments for this usually flow from the company’s earnings.
Caution ? very often the former shareholders allow themselves a significant say in this process, which can certainly lead to conflicts in the future direction of the company.
If a bank finances the difference between the purchase price, the managers’ equity and the entrepreneurial loan, this leads in practice to fewer frictional losses. In this constellation, however, a subordination of the entrepreneurial loan is demanded by a majority of banks.

Another viable source of financing is the procurement of private equity. This can sustainably improve a company’s equity base, especially in the interest of creditworthiness. Private equity companies invest almost exclusively in unlisted companies and thus represent an important potential source of financing for management buy-outs. In contrast to banks, the aim of such investments is to achieve an active say in the company, in addition to interest on the capital, in order to prepare for a lucrative exit.