Asset based lending for a management buyout.

Asset based lending is secured funding sized against the value of a company's assets, advanced as a revolving facility that rises and falls with those assets. It differs from a term loan in one important respect: the lender is underwriting collateral and its conversion to cash, not a forecast. That changes who can borrow. A haulier, manufacturer, recruiter, wholesaler or engineering business with a substantial debtor book and hard assets can often support more debt on this basis than three years of EBITDA would justify.

In an MBO the structure is straightforward. The newco acquires the shares, an asset based facility is put in place at the trading company on completion, and the initial drawing funds part of the purchase price. The same facility then funds working capital from day two onwards, which matters because a buyout consumes cash precisely when the business is adjusting to new ownership. A debenture over the company, cross guarantees within the group and personal guarantees from the directors are the usual security package.

Start with the basics: what is a management buyout and the five funding sources.

Four classes, in descending order of how comfortable funders are with them. Trade debtors come first, with advance rates commonly up to 90 percent of the eligible book through invoice discounting or factoring; this is almost always the biggest single line. Finished stock and raw materials follow, typically at 30 to 50 percent of a discounted valuation, sometimes only where the debtor line is already in place. Plant and machinery attracts 50 to 70 percent of a desktop or full valuation, usually on a fixed term rather than revolving. Freehold or long leasehold property supports 60 to 70 percent, often as a separate term facility.

Intangibles occasionally count. A few funders will lend against contracted recurring revenue, intellectual property or brand value, but that is closer to cash flow lending in character and pricing. What none of them will do is advance against work in progress with no invoicing right, debtors owed by connected companies, or export debtors in jurisdictions where they cannot enforce. Knowing which of your assets a lender will count before you agree a price with the vendor is the single most useful piece of preparation in an asset based deal.

Model the funding structure · Value the business on EBITDA

Whenever assets are large relative to profit. A cash flow lender sizes debt at 2.0x to 3.0x EBITDA of EBITDA, tested at a debt service cover ratio of about 1.3x. On £600,000 of EBITDA that is roughly £1.2 million to £1.8 million. The same business with a £2.5 million debtor book and £800,000 of plant might see £2.5 million or more of availability from an asset based package. For distributors, contractors and manufacturers with thin margins on high turnover, the gap is often decisive.

The reverse holds for asset-light businesses. A consultancy, software company or agency with strong margins and almost no balance sheet will raise far more against EBITDA than against assets, which is where cash flow lending and mezzanine belong. Plenty of buyouts use both: an asset based line for the working capital and part of the price, a term loan for the remainder, and a vendor loan note behind them. Total debt across the layers commonly reaches 3.0x to 4.5x EBITDA including mezzanine or vendor debt.

Compare with senior and cash flow term loans and vendor finance.

The facility is procyclical. If turnover drops 25 percent, the debtor book drops with it and availability contracts just as the team needs headroom, which is a materially different risk profile from a fixed term loan. Reporting is heavier, and a business that has never produced a weekly aged debtor report will need to build that capability before completion, not after. Customer-facing factoring, where the funder collects, changes how your customers experience you, though confidential invoice discounting avoids that.

There are two structural traps worth naming. First, using a revolving working capital line to fund a fixed purchase price leaves the business permanently drawn with no room to breathe; the acquisition element should be carved into a term piece wherever possible. Second, concentration. If one customer is 40 percent of the ledger, the facility is really a bet on that relationship, and the vendor's price should reflect that. We flag both before terms are signed rather than after the first covenant test.

Also worth reading: MBO advantages and disadvantages and personal guarantees.