Funding an MBO

Funding an MBO

Funding an MBO

Funding the MBO is usually assumed by promoters as difficult to go ahead with considering their current cash flows, However in reality MBO can be structured using various means of financing . Where management has to put in small amount of money and rest can be arranged from Institutional Equity/Debt etc..

We at Redwood Syndicate help mobilize required funds from best suited means to complete the acquisition.

Acquisition Financing Options are:

  • Cash Component from Acquirer
  • Private Equity/Institutional Capital
  • Structured Debt
  • Earn Out

Cash Component from Acquirer:

Cash Component from promoters depends on various scenarios. From health of the company financials to promoters commitment and vision. This money contributed is often treated as first step towards generating interested from all other financiers who shall make the acquisition possible.

Private Equity/Institutional Capital:

This is most sort out means of funding which is a pure equity participation from Private Equity Funds or Venture Capitalists. Investors here work with management on shared vision and is consider investments as growth capital investments.

Features of Equity finance for MBO:

  • Majority of acquisition finance through Equity
  • Flexible structure
  • Risk capital
  • Industry experts joining the Board
Structured Debt:

Structured Debt financing is based on security offered as underlying asset based on which the volume of the funds are calculated

Financial Institutions fund against assets including debtors, stock, plant and machinery, and property in a structured way to secure the investment and Rate of Return.

Features of Structured Debt for MBO:

  • All debt products are designed against Receivables, Cash Flows and Collateral. This mode of financing helps in maintaining required working capital limits for business.
  • Debt is usually cheaper than Equity.
  • Structured Debt enhances overall operational ability of the business to meet day to day expenses which are tagged to Receivables, Inventory, Trade Finance etc…
  • Most of Structured Debt is designed based on Future cash flows a business can generate based on financial model.
Earn Out:

Earn Out is business is valued based on future performance of the acquired company and valuation is arrived at business performance. This mechanism bridges the Gap between Buyer and Seller and helps in arriving at solution to acquire a business, where buyer is skeptical and seller is optimistic at the time of acquisition. Under this structure seller enjoys hand holding for the acquirer and participates in business in short to medium term to enhance his valuation.

How can we help:

  • Relevant consulting across business verticals.
  • To Meet, Discuss with Management and Define appropriate sources of funding for MBO.
  • Negotiate with Stakeholders.
  • Arrange for Funding (Equity & Debt) as required.

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