B I M BO? Don’t panic… it’s not what you think. That’s the acronym that the finance folks use for whats known as ‘ Buy in Management Buy Out ‘ for business owners and management who are contemplating purchasing their own or an existing company. Let’s look at MBO 101 with a focus on helping small and medium sized businesses in Canada who don’t necessarily have access to the resources and talent to properly complete such a transaction on their own.
We’re quite sure that hundreds, perhaps thousands of business people in Canada are at any one time contemplating purchasing their own firm, or one in which they have targeted or are associated with . Larger corporations of course have access to tons of talent with respect to lawyers, advisory firms, etc when they contemplate this type of deal. Typically we open the business news page and see headlines announcing such purchases that have either been done behind close doors or sometimes catching one of the parties totally off guard.
Let’s focus on some core basics that small firms in Canada can focus on when it comes to a management buyout or leveraged buy in.
As a business person considering an MBO focus initially on two concepts, debt and equity. In spite of the negative connotations of ‘ debt ‘ you can still acquire a firm in a very successful manner by using a combination of either bank loans or other asset based debt that use the assets of the company . Just make sure of course that the right amount of due diligence is done of making sure that you can meet any interest and loan payments out of the cash flows of the on going business! That can’t be overemphasized!
By using just a small amount of equity, either your own new equity or existing equity in the new business going forward you are able to leverage a great transaction… as long as your new debt to equity ratio is still reasonable. Debt to equity ratios vary by industry … a very typical debt to equity ratio for a manufacturing type company is 2:1.
When you get overly aggressive on debt in the excitement of finalizing your transaction you of course run the risk of a business failure. In a perfect world (and trust us, we know its not) you end up with a solid management team, a reasonably financed firm, and lots of potential for profit and growth via new synergies of management, etc.
Business people should also be considering at an early stage how they someday will exit from the transaction. They often see a huge return in the future on the risk and capital they have put on the table, but need to understand how that will ultimately be monetized.
The bottom line – MBO… Our ‘ management buyout ‘ or leveraged buy in is often a fabulous opportunity for managers and owners to take advantage of a great business opportunity based on their skills, knowledge, etc. Using assets already in place allows you to capitalize on a great opportunity. Just think of it, you have used the assets of an existing company to pay for it. That’s sometimes called ‘ bootstrapping’
So, can a great BIMBO strategy work? Absolutely, and it can be financed via a bank, asset based lender, private equity firm or some other more esoteric types of financing. Speak to a trusted, credible and experienced Canadian business financing advisor for help with your BIMBO!!