How much cash does an MBO team need to contribute?
Most MBO candidates need more financial resources to contribute to the deal significantly.
The available amount will often be a fraction of the overall funding required; nevertheless, all lenders expect them to contribute “hurt money” to the deal. This will be an amount that would “hurt” to lose, thereby giving them a financial reason to assist should things take a turn for the worse, rather than “putting the keys through the letterbox” and walking away.
Lenders have different views on what they consider acceptable, and each deal and MBO candidate will have other personal financial circumstances.
The general rule of thumb is to expect a contribution equal to 12 months’ salary.
It is common for management team members to borrow some or all of this personal contribution.
If there is no contribution, many lenders would be put off as they would see this as no commitment.
In addition to cash, in some circumstances, the management team may be expected to provide limited personal guarantees to funders. In the case of utilisation of invoice discounting facilities, give a fraud warranty.
Management typically puts the smallest amount of funding into a transaction but stands to make the most significant financial gain. This allows management to acquire the business they are running, financed predominantly with other people’s money. Repayment of which comes from the profits generated by the company received and from its ultimate sale.
Therefore, an MBO is often an attractive option for management teams.