Question

EXPLAIN the factors the venture capital fund is likely to consider or impose when financing a Management Buy Out.

Answer 1

Management Buy Out simply means that company's management team buys back company's assets and operations. They do that to go private and operate their business or to improve profitability and also to increase ownership of the company. If we have to understand it more simply then it is like any other acquisition process.

Management simply wants to derive greater rewards from the progress of the company than they would get when they acted as employees of company.

What a venture capital fund company will do is that they will arrange funds and give structure to the buy out.

Factors considered by venture capital fund when financing a Management Buy Out are -

1. The most important facet that venture capital fund company will be looking for is the management of the company. They will look at their competence, vision, mision and plans for taking the company ahead. They should show a strong committment to the buy out deal.

2. Venture capital fund should look that the buy out is possible in the first place and there it is conducted for strategic reasons and investors of company are not going to suffer loss by this deal.

3. They will consider that the seller is willing to sell the assets and operations and is not doing so because the company has excessive debt or operations are failing.

4. The funding should be majority from management's own net worth and funds. It is necessary to instill confidence in investors and also venture capitalists and private equity who would be aiding in the process.

5. The company should have good track record of profitability in the past and visions of greater future prospects.

6. The vendor should also be able to sell the management at a realistic price.

7. Detailed financial analysis and valuation is being conducted and right amount should be decided