Engineering MBO Finance
How Doulton Bridging Finance structured and sourced £1.8m of senior MBO debt to enable a management team to complete a £2.5m buyout of a precision engineering business.
“We had run this business for a combined 40 years between us. We knew every customer, every machine, and every margin. Getting the finance to buy it was the hard bit. Doulton made that part straightforward.”
The Scenario
The founder of a South Yorkshire precision engineering business, supplying machined components to Tier 1 and Tier 2 automotive and aerospace manufacturers, had decided to retire at 67 after 31 years of ownership. The business employed 48 people, operated from a freehold factory of 18,000 sq ft, and generated annual revenue of £4.8m with EBITDA of £520,000. The management team, comprising the operations director, the sales director, and the finance manager, had collectively run the business for a combined 40 years and had been earmarked by the founder as the preferred successors.
The Challenge
The three managers had between them £350,000 in personal savings and remortgageable equity that they were willing to contribute. The business had been independently valued at £2.5m (4.8x EBITDA), reflecting the quality of the customer base, the modern machinery, and the freehold property, leaving £2.15m to be raised from external sources. An early approach to their bank was encouraging in conversation but resulted in an indicative offer of just £1.1m, far below what was needed; the bank cited the managers' personal balance sheets and the fact that the loan would exceed 2.5x EBITDA once the full property acquisition price was included. The team engaged Doulton Bridging Finance to explore whether the full transaction could be funded through a combination of senior debt and other structures.
The Solution
Our first step was to remodel the transaction to separate the two distinct assets being acquired: the operating business (goodwill, customer contracts, machinery, and working capital) and the freehold property, a common MBO structure that lets a business loan lender and a commercial mortgage lender each assess a simpler deal. We then introduced a vendor loan note, an agreement for the founder to receive £350,000 of the consideration over three years rather than all on completion, which cut the day-one cash requirement from £2.15m to £1.8m and gave the senior debt lender a more comfortable DSCR position; the founder agreed, viewing the deferred element as a capital gains tax planning tool on his accountant's advice. We approached six specialist MBO lenders with the restructured proposal, four returned indicative terms within five working days, and the preferred lender, a challenger bank with an active MBO team, provided £1.8m at a blended rate of 7.4%, structured as a 7-year term loan with a 2-year interest-only period to reduce year-one debt service.
The Deal Structure
| Transaction Value | £2,500,000 |
|---|---|
| Senior Debt (challenger bank) | £1,800,000 - 7-year term, 7.4% blended rate |
| Interest-Only Period | 24 months, then capital and interest |
| Management Equity | £350,000 (personal savings and remortgage) |
| Vendor Loan Note | £350,000 over 36 months at 4% interest |
| EBITDA Multiple (debt only) | 3.46x (senior debt on EBITDA) |
| DSCR (Year 1, interest only) | 2.1x (£520k EBITDA vs £247k interest) |
| Security | Debenture over business assets + personal guarantees |
The Outcome
Legal completion took place 14 weeks after initial instruction to Doulton Bridging Finance. The founder received £2.15m on completion and the £350,000 vendor loan note on a quarterly repayment schedule over three years. In year one under management ownership, the team retained all key customer contracts and brought one new automotive customer onto the approved supplier list, contributing £380,000 of incremental revenue. The business returned to Doulton Bridging Finance 18 months after completion to explore refinancing the senior debt onto improved terms, having demonstrated a clean repayment record and revenue growth ahead of the initial projections.