An Investor Need Not Be Your Buyout Boss; in the Second of Two Articles on Management Buyouts and Buy-Ins, NATASHA MUKTARSINGH Shows How a Deal Can Be Financed without Parting with Half the Firm

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ENTREPRENEURS hate the idea of handing over a slice of their company to an outside investor, but that is the price of success in many management buyouts.

Venture capital firms usually demand a seat on the board and a majority stake in the firm. But there are ways to limit this stake, or even to avoid venture capitalists altogether.

One is invoice discounting, where the buyout team can borrow against the amount owed by customers.

Another is a loan based on the value of the firm's assets.

Murray Chisholm, managing director of invoice finance company Fortis Commercial Finance, says: 'Venture capital is the first option people think about to finance a buyout. If the management team puts in a few thousand, the venture capitalist will end up with perhaps 50 per cent equity. But if you use the sales of the company as leverage-to raise finance, the investor may take only 20 per cent.' He adds: 'Not all products and services suit invoice discounting, but nearly half of buyouts in small and medium-sized firms use it. If you have sales of pound sterling3 million, you could raise up to pound sterling2. …