Equity from new Management

Perhaps the most important type of financing comes from the managers who are making the purchase.

The management team that is organizing the buyout must contribute some of their own cash and assets to purchase the target company.

It is not unusual for managers to raise the funds by selling off certain assets (e.g., stocks) or getting a second mortgage on their home.

The management team’s financial contribution is very important. Funding companies consider it a gauge of how committed the team is to the transaction.

In some cases, the management team may be able to secure financing through a private equity firm.

However, private equity firms prefer scale and tend to invest in larger transactions.

Their investment may consist of buying shares and/or providing additional funding such as loans and asset-based financing. Keep in mind that the private equity firm may have objectives that differ from those of the management team.

Private equity firms usually want a liquidity event after 3 to  6 years. They look to exit the transaction in that time frame, allowing them to realize their gains.

Consequently, their funding programs often include stipulation of how the company is to be run and what objectives have to be met.