Management Buy-Out and Buy-In Funding

For many owners, sale of their company to the existing management, could be their optimum business succession plan. The benefits of management continuity, preservation of the company’s culture and ongoing continued connection of the seller, can make an MBO a very attractive exit strategy for some owners. The challenge with MBOs is that management does not typically have the financial resources to structure the deal. The selling owner, is often seeking to create a significant liquidity event for estate planning, leading the way to risk diversification and eventual retirement.

Traditionally, MBOs have been structured with a fairly high level of institutional debt, (or worse seller debt) with the equity component, provided through a private equity firm. The downside of these deals is that management usually receives a very small portion of the stock, and valuations that are expected be more conservative than sale to a strategic buyer might otherwise achieve.   Post transaction, the company is controlled by the private equity firm. So in reality the cultural and operational changes to the business, are often not much different than if the deal was structured as an outright sale to a private equity firm or strategic buyer.

Financing an MBO transaction with a private placement to a large group of investors, through a 506(c) general solicitation offering, potentially changes the control and economic dynamics significantly. The benefits could include:

  • a large dispersed capital group of passive investors, rather than a single control oriented private equity firm
  • less debt – private equity firms use high leverage to enhance yields, but that can increase risk
  • Management can receive a higher level of ownership and control
  • The seller maximizes the company value, preserves its culture and creates a significant liquidity event

Using a general solicitation private placement to support a MBO or Management team buy-in, could be compared to a “Private IPO” for smaller companies. All the benefits of an IPO without the regulatory complexity, market manipulation and extreme ongoing costs of compliance.

The principal’s at SPG Capital have worked representing company owners, management and in some cases both, in structuring and capitalizing MBOs and MBIs.