Flexible Financing - Don’t Let Change of Control Derail Your MBO

Management teams embarking on a Management Buyout (MBO) to acquire their company is a compelling goal. This journey involves navigating complexities such as valuation negotiations, resolving stakeholder conflicts, and ensuring legal compliance. Successful management teams navigate these challenges by meticulously preparing, seeking expert advice, and maintaining strategic alignment.

However, despite management’s strengths in overcoming obstacles, a critical hurdle can emerge and threaten the buyout if the company’s bank invokes a change of control covenant.

A change of control covenant is a protective measure in financial agreements that addresses the implications of significant ownership or management changes within a company. It typically entitles the lender to execute several options, including demanding immediate debt repayment, restructuring loan terms, or terminating the financing agreement.

This happened in a recent management buyout case involving a renowned book publishing company. The company’s senior bank partner faced a challenging decision when informed of the upcoming ownership transition. In reassessing its support, the bank chose to withdraw credit as the buyout significantly altered the funding arrangement and pushed the facility outside the parameters of the bank’s strategic objectives and risk management framework. Seeking a new finance partner willing and able to support the transition was pivotal in achieving the publisher’s change of ownership. This story underscores how financial flexibility is crucial in navigating complexities and how eCapital, a leader in specialty financing, structured a tailored solution to achieve a successful transition.

Why Banks Invoke Change of Control Covenants

Conventional lenders, such as banks, often include change of control covenants in loan agreements. These clauses give conventional lenders the right to call back a loan or modify its terms if there’s a significant shift in ownership. From the bank’s perspective, a change in leadership can introduce uncertainty about the company’s future financial performance and ability to repay existing debt. This perceived risk can lead banks to pull out of financing deals when an MBO is on the table.

Navigating Complex Transitions: A Case Study in Success

A recent case illustrates the critical role of financial flexibility in navigating complex transitions such as management buyouts. eCapital’s recent involvement in a book publishing company’s MBO is a prime example of how specialty financing can facilitate a successful ownership transition.

The challenge: A fifty-year family-owned publishing enterprise faced significant challenges during a management buyout. The terms of the purchase agreement mandated a working capital line to support day-to-day operations, including purchasing new inventory, paying employees, and covering operating costs. However, the bank’s change of control covenant barred the new owners from assuming the existing bank financing.

Without the bank’s working capital line, the management team’s ability to run the business and complete the MBO was seriously compromised. Wanting to divest from the existing relationship yet help service the deal, the banker referred eCapital to step in and assist.

The solution: Recognizing the urgency of the situation, eCapital was expedient, addressing it with a solution-focused approach.

eCapital structured a competitive and confidential $3.5 million invoice factoring facility with an inventory sublimit specifically tailored to support the MBO. This bespoke solution provided the management team with a critical lifeline. It now had the working capital needed to complete the acquisition, ensure the continuity of the company’s operations, and support growth.

From first touch to first funding, the refinancing process was streamlined to ensure timely response to an urgent need.

The Transformative Impact of Specialty Finance

Specialty financing offers a versatile funding solution, as illustrated by the book publishing company’s MBO experience. This case highlights its transformative impact across various industries, supporting diverse cash flow needs through options like asset-based lending and invoice factoring .

When navigating the complexities of an MBO, specialty financing offers several advantages for management facing a change of control obstacle:

• Fast and flexible funding gives the business immediate access to working capital. This allows MBOs to keep operations running smoothly and complete the acquisition.
• Minimal covenants allow businesses greater flexibility and control of their funds without the constant pressure to meet restrictive terms, specific financial metrics, operational requirements, or the administrative burden related to compliance and reporting. Fewer covenants can lead to a more collaborative relationship with the lender and provide the necessary breathing room to experiment and grow without the fear of breaching covenant terms.
• Supports growth with increased access to credit. As business assets increase, such as receivables, inventory, or equipment, the facility’s borrowing capacity can expand to meet the needs of the business.
• Straightforward qualification streamlines the credit application process, enabling companies previously turned down by banks to access capital more easily. Companies with creditworthy customers and valuable assets, such as a solid book of receivables, can be approved despite diminished credit scores or underperforming business metrics.

Conclusion

Management buyouts offer tremendous opportunities for talented teams to take possession of their success. However, change of control covenants can create hurdles, impeding ownership transition.

The book publishing company’s case underscores the critical role of financial flexibility in navigating complex transitions such as management buyouts (MBOs). When traditional financing avenues presented obstacles, a bespoke invoice factoring and inventory financing solution emerged as a crucial lifeline. It enabled the management team to secure the working capital needed to complete their acquisition and ensure the company’s continuity.

Tailored financial solutions, like those provided by eCapital, can overcome the cash flow challenges prevalent in today’s business environment. If you’re part of a management team contemplating an MBO, specialty financing might be the key to unlocking your financial goals. eCapital’s experienced team can help you assess your financing needs and develop a customized solution that smooths the path to ownership.

From funding new equipment in manufacturing to fueling product development in technology firms, specialty finance bridges working capital gaps for growing businesses, those in financial distress, and management buyouts across different sectors.

Contact us today to request a free financing consultation and see what we can do for your business.

Key Takeaways

• Embarking on a Management Buyout (MBO) to acquire their company involves navigating complexities such as valuation negotiations, resolving stakeholder conflicts, and ensuring legal compliance.
• Despite management’s strengths in overcoming obstacles, a critical hurdle can emerge and threaten the buyout if a company’s existing bank invokes a “change of control” covenant.
• Specialty finance provides management teams with an alternative working capital solution to complete their acquisition and ensure the company’s continuity.
• A recent management buyout case involving a renowned book publishing company illustrates the critical role of specialty finance in navigating complex transitions such as MBOs.