The prospect of acquiring a business that you have helped to grow as a management team can seem like an excellent opportunity, however, many stumble at the first block – funding.
Unlike traditional acquisitions, MBOs in the UK rarely rely on a single source of funding, instead they typically involve a blend of debt and equity to ensure a balanced and sustainable capital structure that supports both the purchase price and the long-term financial health of the business.
The common sources of funding include senior debt, mezzanine finance, equity contributions from the management team and external investors such as private equity firms.
Senior debt is often the cornerstone of MBO financing in the UK. Lenders provide term loans secured against the assets and future cash flows of the business.
The amount of senior debt available depends on the company’s financial health and its ability to generate predictable cash flows.
With UK banks such as Barclays, Lloyds and HSBC active in the market, securing senior financing can be competitive, provided the business can demonstrate robust financial performance.
When senior debt doesn’t cover the full funding need, mezzanine finance comes into play.
Mezzanine debt is more expensive than senior loans but offers greater flexibility, often including equity warrants or profit-sharing arrangements.
This form of funding allows the buyer to leverage higher amounts of capital without diluting ownership too much.
It’s a common solution for MBOs that need more financing to close the deal but still want to maintain control over the business.
Management teams usually invest some of their own capital in the buyout, often referred to as ‘rollover equity’.
This demonstrates their commitment to the future of the business and aligns their interests with those of the investors.
Management equity reduces the need for third-party capital and reinforces the buyout’s legitimacy.
For many UK businesses, this is a key element in balancing the risks and rewards of an MBO.
Private equity (PE) firms have become a critical source of funding for many MBOs in the UK.
These firms inject capital in return for equity ownership, often in exchange for strategic input, industry expertise and governance oversight.
Private equity partners can help MBOs scale more quickly and access new markets, but they also bring the expectation of performance and return on investment.
Although not used in smaller MBOs, PE backing is often essential for larger MBO transactions and those seeking rapid growth.
Seller financing allows outgoing owners to accept part of the purchase price over time, reducing the upfront cash requirement for the buyer.
This structure can benefit both parties; the seller can still receive their full value, while the buyer has more time to generate the necessary funds.
Seller financing is especially helpful in the UK when there are cash flow concerns or limited access to external finance.
In some cases, earn-outs or vendor loans are used to bridge the gap in valuation or financing.
An earn-out ties a portion of the purchase price to future performance, aligning the seller’s interests with the business’s ongoing success.
This approach reduces risk for the buyer, as it ensures the business meets certain milestones before full payment is made.
In asset-rich businesses, buyers can leverage asset-based lending or invoice finance.
These financing methods allow businesses to unlock capital tied up in assets such as property, equipment or outstanding invoices.
This type of financing can provide crucial liquidity, allowing the buyer to fund the buyout without taking on more equity or debt.
These options are particularly useful for UK businesses with significant physical or receivables assets that can be pledged as collateral.
The key to successful MBO funding in the UK lies in structuring the right mix of debt and equity.
Buyers need to assess the financial stability of the business, the growth potential and how best to balance control with external investment.
A well-structured deal will ensure that the business has the capital to execute its growth strategy, while also keeping ownership and governance within the management team.
We advise UK management teams on MBO funding structures, working closely with lenders, investors and advisers to design sustainable capital solutions. Our Corporate Finance team supports clients from initial planning and funding strategy through to completion.
If you need support or guidance with an MBO, please get in touch with our Corporate Finance team at Lubbock Fine.
