What is Management Buyout?
A Management buy-out (MBO)
is an acquisition of a business
by the management team through debt (senior or mezzanine financing
provided by banks) and/or equity financing from the business owner or private equity groups
. Every MBO has different nuances
, but the basic structure follows a pattern. The management team, along with their financial backers, forms a holding company which then goes on to acquire the target business. The management team will need to inject, raise, or borrow sufficient capital to pay the seller, cover initial working capital
requirements, and pay transaction fees.
Necessary Elements For Success
A management buyout will most likely succeed
if these required elements are present:
- A strong management team that is bankable (i.e. they know the business well and banks/investors would financially back the team in completing the acquisition)
- A CEO or person that can lead the other management team members through the process and the business after acquisition
- A clear strategy for executing the business acquisition and negotiating funding from financial institutions and potential investors.
Advantages and Disadvantages
Some advantages of a management buyout include:
- Loyalty and a sense of belongingness that becomes more evident among the members of the management team since they play a vital role in the entire process of a management buyout.
- Motivation for every employee of the existing company regardless of his/her current position to contribute effectively for overall success.
- Closer relationship between the existing business and the chosen investor or financial institution who had expressed interest to fund their financial needs during an MBO.
On the flipside, an MBO will also have some disadvantages and challenges:
- An MBO will not typically generate the highest purchase price for an existing business owner.
- There are many different parties involved (who also have their own team of advisors,) which generally consist of the management team, financiers, and the owners.
- The complexity of the deal itself which can easily overwhelm existing owners. For instance, legal contracts associated with MBOs are typically more complex than in a normal business sale, as there are at least three parties involved, rather than two.
- The amount of care that must be taken to preserve relationships with customers, suppliers, and creditors. Maintaining these relationships is crucial to ensure the long term viability of the business that is being transferred from one owner to another.