What Does Management Buyout (MBO) Mean?
A management buyout (MBO) is a transaction where a company's managers obtain debt and/or equity financing to purchase the same company's assets and operations that they are responsible for managing. Investors and bankers are open to management buyouts because the managers are intimately familiar with the operations, and they can create value by continuing on in the business.
Divestopedia Explains Management Buyout (MBO)
MBO's are particularly appealing to private equity firms who can provide the capital while ensuring that a capable management team is already in place. Usually, these situations occur when an owner is retiring and has developed a capable management team underneath, or for large conglomerates who are looking to sell non core divisions or assets. This type of transaction is particularly appealing because it limits the time and expense required to fully market the business to potential third party acquirers.
A seller should be careful if the business is being marketed to a number of potential buyers, and subsequently the concept of an MBO is introduced. This could cause significant problems in a controlled auction process because the management team now becomes a competing bidder for the business. In this scenario, the management team may scuttle any other offer from legitimate buyers resulting in a lower price realized for the business.