Management Buyout Consulting | Management Buyout Financing (MBO Financing)


MBO Management Buyout Financing

How To Execute MBO Management Buyout Financing (MBO Financing)

Management Buyout Financing: How Most MBO Financings are Done

Private equity firms like the Carlyle Group, Kohlberg Kravis Roberts and many others have made huge returns for investors through a management buyout.  Using financial engineering and a lot of debt these firms execute management buyout financings and buy companies with little money down.  While these types of transactions create spectacular returns for investors, they often shortchange the seller and management teams that drive the business.  Thankfully, owners and managers can use these same financial tactics to buy and sell their business and have the benefit accrue to them. management buyout

Private equity firms do hundreds of management buyout financings (MBO financings) a year. Their typical approach is to offer to buy a controlling stake in a company using leverage they obtained from banks based on the financials of that company.  Often times these firms commit very little of their own money to purchase the business.   With little cash invested, these deals create spectacular returns for the management buyout firm.

Management buyout firms also collect large fees up front, as well as additional advisory fees while operating a company they've acquired, and a big share of the investment profits. The average annual management fee to do business with a private equity firm is about 1.5% to 2.5%. The average share of profits is about 20%.

While management buyout firms give management partial ownership, it’s usually less than 20% of the company.  This type of management buyout is the most common and is typically called a Sponsored Management Buyout (or Sponsored Leveraged Buyout), where the equity player is the “Sponsor.”

Non-Sponsored Management Buyout (Non-Sponsored MBO Financing)

For financially healthy businesses, there is another approach that utilizes the same financing techniques but management gains operating control.  In fact, management can end up owning 85% to 100% of the Company depending on the situation. This type of buyout is called a Non-Sponsored Management Buyout.  The process of completing a non-sponsored MBO is pretty much like any other kind of business financing.

The key requirements for a successful non-sponsored MBO Management Buyout include:

Quality Company and Team:  An ideal situation is for the buyer(s) to already be running a profitable business.  Common situations would be a CEO that buys a company from a passive owner or a limited partner buying out his or her majority partner(s).  The key is for would-be lenders or investors to have confidence in the management team once the owner walks out the door.

Proactive Management:  Many prospective buyers never ask for the opportunity to buy their owner’s business or buyout a partner.  Many are reluctant because they are unfamiliar with the process or believe they can’t qualify for financing.   Interestingly, it’s the financials of the company, not the individuals, that drive the ability to perform a non-sponsored MBO.  The best way to start such discussions is to informally ask if the owner is open to discussing it. Once you get a ‘yes’ (even a tentative ‘yes’), more homework can begin.

Agreement on Purchase Price:  Agreeing on a purchase price for the management buyout can be as complicated or as simple as both parties want to make it. Still, most small to mid-sized companies are valued at a multiple of between 4 to 7 times cash flow(commonly called ‘EBITDA’ – for earnings before interest, taxes, depreciation and amortization).   As an example a company that makes $2 million a year EBTIDA could be worth $10 million at a 5 multiple (5X).   Knowing this, the most direct way to get a price is to ask the owner their price.   A purchase price within a 4 to 7 range of EBITDA will probably work to successfully achieve the MBO Financing. In fact, Lantern's experience has shown buyers will end up owning more through a non-sponsored management buyout than a sponsored MBO even if they have to overpay some in order to buy the company.

Understanding Management Buyout Financing Options (MBO Financing):  Most companies know they can get debt from banks and equity from buyout funds.  However, a there are a variety of lesser known funding sources such as subordinated debt lenders, insurance companies, corporate development companies, hedge funds and other specialty lenders that will lend beyond a traditional bank.  These are the same institutions that buyout firms use to fund their acquisitions.  Depending on the economic climate, many of these institutions will lend up to and sometimes over 4 times cash flow (EBITDA).

Creative Management Buyout Math:  Putting it All Together

Management Buyout Financing (MBO Financing): Should the management buyout financing fall short of what is desired by the owner, management and the owner can still execute the transaction, but the owner may retain a portion of the business until their “equity” is repaid.

Following the buyout math here, if a buyer purchases a company for $10Million (5X EBITDA) and can borrow $8Million (4X EBITDA) they end up owning 80% of the Company, and the Seller would retain a portion of the company, but their piece would become “the equity”.  Owners are satisfied because they get a majority of their cash up front with no recourse. Buyers like it because they get control either upon the initial buyout, or as the equity is paid out to the seller over time.  The Seller can be repaid over a period of time (decreasing their ownership over time).

Most specialty lenders do not require personal guarantees limiting the downside risk to new owners.  Over time the owner’s remaining interest can be bought out, often at a higher valuation.  Most important, the value to all parties is directly driven by the buyer’s performance rather than financial engineering by outside investors.

Client Testimonials

“I spent years doing research and speaking to advisors, investors, and banks.  I could find no support for the kind of management buyout transaction I wanted to do and believed could be done.  That is, until I stumbled upon Lantern Capital Advisors.  Just one phone call to Lantern and I heard the words, "it absolutely can be done!"  Lantern then helped me make it happen.  I will be forever grateful to Lantern Capital Advisors for their counsel, expertise, and hard work in leading us to our goal.”— DF, CFO, Full Service Call Center

“I spoke with multiple financial firms about the possibility of conducting a management buyout of a particular division.  Most of them seemed more interested in developing a long term relationship with the parent company than they were in securing the best possible deal for me.  I was then referred to Lantern Capital Advisors and things just clicked.  They listened carefully to my vision for the business and patiently explained every step of the management buyout process.  They met every expedited timeline and used their extensive network to find me the best possible investment group.  I don't know that a deal would have been completed without their guidance.  I would recommend Lantern Capital Advisors to anyone contemplating a similar transaction.”— JR, CEO, Consumer Products Company

As a corporate financial consulting firm, Lantern Capital Advisors has a defined process to raise capital.  We have a three phased approach to raise capital to achieve management buyout financing.

WE ARE NOT A BROKER.  WE ARE NOT AN INVESTMENT BANKING FIRM. Lantern Capital Advisors is a corporate financial consulting firm that specializes in corporate financial planning and executing buyouts, and is specifically geared towards raising capital for established growing companies.  

Lantern Capital Advisors does not accept referral fees, broker fees, or equity as any compensation from any client or institution.

Our Services Offerings Include:

Consumer Services

$ 2 Million Financing MBO

  • US Region Southeast
  • Revenues $7 Million
  • Financing $2 Million
  • Use of Proceeds Management Buyout
  • Business Type Consumer Services

Owner Buyout

$ 7 Million Financing MBO

  • Capital Invested $200,000
  • Ownership Granted Through Buyout 25%
  • Projected Ownership Outcome 55%
  • Use of Proceeds Management Buyout
  • Business Type Company Division Management Buyout


$ 19 Million Financing MBO

  • US Region South
  • Revenues $25 Million
  • Financing $19 Million
  • Use of Proceeds Management Buyout
  • Business Type Services


$ 5 Million Financing MBO

  • US Region Midwest
  • Revenues $11 Million
  • Financing $5 Million
  • Use of Proceeds Management Buyout
  • Business Type Consulting

Tech Distributor

$ 45 Million Financing MBO

  • US Region Southeast
  • Revenues $130 Million
  • Financing $45 Million
  • Use of Proceeds Management Buyout
  • Business Type Technology Distributor


$ 65 Million Financing MBO

  • US Region Southeast
  • Revenues $137 Million
  • Financing $65 Million
  • Use of Proceeds Management Buyout
  • Business Type Distributor