How to finance buying a business or MBO in Ireland

In a management buy-out (MBO), the people who already run the company buy it from its owners. It is common when a founder retires and family members do not want to take over. A management buy-in (MBI) is similar, but the buyers come from outside. In both cases the buyers usually set up a new company, often called a newco or bid company, which borrows to buy the target company.

Few buyers fund the whole price from one source. A typical funding mix includes:

• Buyers' own money: cash from the management team or new owners. Lenders want to see the buyers carrying real risk.
• Senior debt: a term loan from a bank or non-bank lender, usually secured on the business. See our page on acquisition finance.
• Vendor financeWhere the seller of a business agrees to receive part of the price later, effectively lending it to the buyer.: the seller agrees to receive part of the price later, as deferred consideration. This shows the seller’s confidence in the business.
• Cash in the business: surplus cash in the target can sometimes be used, but only within the rules on distributions and financial assistance.

Can the SBCI scheme fund a business purchase?

Usually not. The SBCIA State-owned body that makes low-cost funding and loan guarantees available to Irish SMEs, farmers and fishers through participating banks and non-bank finance providers. Growth and Sustainability Loan Scheme excludes most purchases of an existing company, with the exception of eligible business transfers. If you think your deal might qualify, ask the SBCI or a participating lender before you rely on it. The scheme also cannot be used to refinance existing debt. Our GSLS guide explains how it works.

A lender is effectively being asked to bet on the business continuing to perform under new owners, on top of its usual business loan requirements. Expect it to look at:

• Earnings: several years of filed accounts and recent management accountsInternal financial reports, usually monthly or quarterly, showing a company's recent trading, balance sheet and cash position., with EBITDAEarnings before interest, tax, depreciation and amortisation. that is stable or growing.
• Debt service: whether profits after the deal can comfortably cover all repayments. Our DSCR calculator helps you test this.
• The price: whether it is reasonable compared with the earnings.
• The team: whether the buyers can run the company without the seller, and whether key customers and staff will stay.
• Security: a debenture with fixed and floating chargesSecurity over a changing pool of assets, such as stock, book debts or cash, which the company can continue to trade with in the normal course of business. over the company’s assets is common, and charges must be registered with the CROThe State body that registers Irish companies and business names and keeps their public filings, including constitutions, director details, annual returns, financial statements and registered charges.. Our guide to secured vs unsecured business loans explains how security works.
• Personal guarantees from the buyers, which are often requested on acquisition loans.

Not directly, unless an exception applies. In most Irish MBOs the Summary Approval Procedure is used so that the target company can guarantee or secure the buyer’s loan lawfully.

Section 82 of the Companies Act 2014 says it is not lawful for a company to give financial assistance towards its own acquisition, or the acquisition of its holding company. Financial assistance is defined widely. It includes loans, guarantees and security. So if the target company guarantees the bid company’s loan, or charges its assets to the buyer’s lender, that is financial assistance.

The section lists exceptions. The one most often used in Irish MBOs is the Summary Approval Procedure. A transaction that breaches section 82 can be voidable by the company against anyone who knew the relevant facts, and the company and any officer in default commit a category 2 offence. This is why lenders and their solicitors insist on getting it right.

How the Summary Approval Procedure works

The CRO describes the Summary Approval Procedure as a way to carry out certain restricted activities with the approval of the people the rules protect. For financial assistance, the steps are:

1. The directors, or a majority of them, make a declaration covering the transaction, its purpose and benefit to the company, and their opinion that the company will be able to pay its debts over the following 12 months.
2. The members pass a special resolution approving the activity. It must be passed no more than 12 months before the activity starts, and the declaration must be attached to the notice of the meeting or to the written resolution.
3. The declaration is delivered to the CRO no later than 21 days after the financial assistance starts. The special resolution is filed separately on Form G1.

Missing the 21-day deadline can invalidate the activity, although the High Court can validate a procedure that was not done correctly. Directors who make the declaration without reasonable grounds can be made personally liable for the company’s debts. Your solicitor will normally manage this process with the lender’s solicitor.

• Borrowing to the limit. If the deal leaves no room for a bad year, one lost customer can put the loan in arrears.
• Forgetting working capital. The price is not the only cost. The company still has to pay suppliers, wages and tax after completion.
• Leaving the Summary Approval Procedure too late. The declaration, resolution and CRO filing all have time limits.
• Relying on the seller for too long. Lenders worry if customers deal only with the outgoing owner.
• Signing heads of terms before taking tax advice on the structure.

• Three or more years of filed accounts and up-to-date management accounts.
• CRO searches: annual returns, directors and registered charges.
• Register of Beneficial OwnershipThe central Irish register of the individuals who ultimately own or control a company, typically anyone holding more than 25% of the voting rights, or controlling it by other means. entry for the target.
• Revenue position: a current tax clearance certificateConfirmation from Revenue that a company's tax affairs are in order., any phased payment arrangement and any open audits.
• Existing loans and finance agreements, and whether they have change-of-control clauses.
• Customer and supplier contracts, and how much of the business depends on the seller personally.
• Employment contracts, pensions and any disputes.
• Leases, licences and permits the business needs to trade.
• Tax advice on the structure, before you agree heads of terms.
• Plan for the Summary Approval Procedure if the target will give security or guarantees.

• A solicitor with company and banking experience for the purchase agreement, security and the Summary Approval Procedure.
• An accountant or tax adviser for valuation, structure and tax.
• Your bank, especially if the company already banks there. Our neutral directory of business lenders in Ireland lists other lenders.
• InterTradeIreland’s Funding Advisory Service, which runs free workshops for established businesses seeking growth finance. It is not suitable for start-ups or pre-revenue companies.
• Enterprise Ireland, if the company is an exporter or high-growth client.

After completion, the company may also need to refinance existing borrowing or arrange working capital to support growth under its new owners.

Once a deal has completed, an established trading company may be able to consider a working capital or unsecured business loan through our panel, depending on its accounts and affordability. Tell us what your company needs and we will tell you honestly whether our panel can help, or where to apply instead. Welcome Finance is a commercial finance broker, not a lender, and is not regulated by the Central Bank of IrelandIreland's financial regulator and part of the Eurosystem.. We work only with companies registered in Ireland.