How invoice finance can facilitate a management buy-out

Business meeting

A management buy-out (“MBO”) is an acquisition where members of an organisation’s existing management team purchase the business. The transaction can be completed by an individual or several decision makers, and usually includes the transfer of all assets and operations.

There are several benefits associated with an MBO which make it an attractive option for buyers and owners alike. Those taking the business over should already know it well, so disruption can be minimised, staff can feel more secure and client relationships can be maintained.

However, it can be challenging to raise the funds required to complete an MBO, and the new leadership must ensure that they are adequately prepared to safeguard future profitability.

In cases where the business under offer has a consistent flow of business to business (“B2B”) invoices, invoice discounting can be an effective finance option. This solution enables businesses to release capital tied up in unpaid customer invoices as soon as they are raised, fast-tracking access to capital.

For many businesses, invoice discounting presents a robust funding opportunity because debtors are their biggest asset. It can therefore be a cost-effective way to release working capital that will support purchase decisions.

Where higher levels of funding is needed, asset based lending (“ABL”) may be more suitable. This type of finance augments invoice discounting with funds released against other assets on the  balance sheet, such as inventory, plant and machinery, and property. Securing finance against assets can reduce the high level of personal risk often associated with buying a business.

Additionally, as both invoice finance and ABL facilities are based on invoice value, they grow with income. This can be useful in cases where deferred consideration is included in an MBO’s structure, or be a comfort for the buyer, providing headroom and ongoing funding for the newly-acquired business once the purchase is complete.

While funding an MBO can be complex, using the established assets of a business can enable the transaction to be completed successfully.

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