Business succession through an MBO or MBI

Assessing the suitability of the future management

An internal team already knows the processes, employees and customers. For a succession, it must also be clarified whether the team wants to and is able to assume full entrepreneurial responsibility. This includes decisions on investment, liquidity and the further development of the business model. The willingness to invest their own capital is a further part of the discussions.

For an external management team, we recommend assessing sector experience and leadership skills against the specific requirements. The handover also needs a plan for the introduction to employees and business partners. The successor's requirement profile and the future role of the current owner should therefore be described before the actual search begins.

Considering purchase price and capital requirements together

For financing purposes, it is not sufficient to consider the purchase price alone. Transaction costs, necessary investments and liquidity requirements after the takeover must also be included in the plan. Financing that is too tightly calculated can restrict the new management's room for manoeuvre from the outset.

We recommend starting from the cash flow that will be available in future. Reported EBITDA is not an amount that can be used in full for interest and repayment. Taxes, replacement investments and changes in working capital influence available liquidity. An integrated plan should therefore also consider weaker earnings scenarios and additional capital commitments.

Aligning different financing components

Depending on the project, the management's own equity, an equity partner and debt can be used together. Private equity firms can also support management takeovers; public investment companies in Germany explicitly name MBOs and MBIs as occasions for their succession financing. Which structure is available and suitable depends on the company, the parties involved and the respective capital provider.

A vendor loan can be a further way of spreading part of the purchase price over time. For the seller, this means that a repayment risk and a financial link to the transaction remain. Term, interest, collateral and any agreed subordination must be included in the economic assessment. Variable purchase price components linked to future results serve a different function.

Depending on company size and the project, public development financing may also be considered. In Germany, KfW offers programmes for business successions and investments. Their suitability must be assessed against the applicable requirements and the specific financing need.

Defining responsibilities during the handover

A gradual handover can secure knowledge and relationships. However, it requires clear responsibilities. The intended duration of the previous owner's involvement, his or her tasks and the authority of the new management should be discussed. In the case of a reinvestment, the future shareholder role must also be considered.

For the management, it is essential that purchase price, financing and their own investment fit together in the long term. For the previous owner, the solution must be compatible with his or her financial planning and intended withdrawal. These interests should be made visible in a shared basis for decision-making.

Structuring succession at an early stage

As an independent M&A and corporate finance advisory firm, Fox Capital supports owners and executives willing to take over a business in assessing suitable succession models. We combine economic structuring with financing expertise and access to national and international capital partners. We coordinate legal and tax matters with the responsible specialist advisers.