How can managers fund a buyout they cannot finance alone?

Managers buying the business they run may not hold the full price on their own. BDC says a financing structure may combine your own investment, a business loan and seller financing, and it lists management and employee buyouts among the purchases its business purchase loan can finance. The harder questions are which loan fits the way the deal is structured and who takes first claim on the assets. Our page on the management buyout covers the deal itself.

Start with what the team puts in

The CSBFP guidelines look at the people as well as the business: they expect the lender to conduct a credit check or obtain credit references on the borrower and/or anyone legally or financially responsible for it, such as shareholders and guarantors, and they let a lender take unsecured personal guarantees up to the original amount of the loan. In a team buyout that can mean each manager is assessed and may be asked to sign, so agree early how much each person is willing to commit.

Which loans fit the deal structure

The CSBFP does not finance buying shares, because the loan would go to a shareholder rather than to a small business buying eligible assets. It can finance eligible assets in a purchase of all or substantially all of the assets of a going concern, for which the guidelines require an appraisal, with goodwill counted within the program’s limits. BDC says it can review a request once you have found the business and negotiated the main terms. Ask each lender how it would treat your structure before the terms are fixed.

Seller financing and ranking

The seller can supply another layer. The guidelines treat the amount a vendor finances as ineligible for a program loan, and where an after-acquired clause in general security held by the lender or another creditor reaches the assets being financed, the program lender must obtain postponements of rank. In Ontario, registration perfects a security interest, and the Personal Property Security Act lets a secured party subordinate its security interest to another. Settle with the seller, early, which assets it will step back on.