Top 4 Tips for Management Buyout Evaluation

Posted on: May 24th, 2021

management buyout evaluation

Management buyouts are a great tool for buyers and sellers alike, as the structure aligns both parties with a common vision of the Company. In the management buyout structure, the buyer is usually seen by the seller as the best way to ensure the business continues in is current state over the long term. Most sellers eschew a financial buyer because they have heard horror stories of other acquisitions that have failed. Sellers are always interested in strategic buyers because they approach things from an operational and strategic standpoint and usually have a large check book.

Yet due to their size, most middle market companies are not always able to attract strategic buyer interest. So, the management buyout is always a strong option for sellers, but there are some important criteria to ensure it is the best approach. These criteria center around deal and transition issues and are always used by lenders to qualify your deal as viable.

Tips for Management Buyout Evaluation

Here are the Attract Capital Top 4 Tips for Management Buyout Evaluation.

Role of Owner post-closing – most lenders like to see active owners’ continued involvement in the business. Even if there is a new CEO, there is tremendous resident knowledge the owner possesses that needs to transition to the new management team. In addition, owner visibility post-closing can help with any market related concerns about the company, post-closing.
Purchase Price – the goal of the management team is to own 100% of the company. To do this, they need to make sure that the cash amount of purchase price can be financed largely with a lender. Lenders use debt to cash flow multiples and loan to value ratios to screen for acceptable deals. LTV percentages should be less than 70% and debt multiples should be under 3.5 times EBITDA.
Buyer’s Equity Investment – management needs to invest a meaningful amount of equity but can use a seller note, if structured correctly, as part of the equity contribution. The equity investment does not have to be 20% but it should be in the 10% to 15% range at a minimum coupled with a large seller note.
Growth Capital need – often new projections are created with accelerated growth for the business. The management team may have been restrained under old ownership and now wants to spread their wings. New strategic growth requires capital bandwidth, which loan -heavy management buyouts often lack. The buyer needs to include growth capital as part of their capital raise when closing the acquisition to avoid this pitfall.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.