A management buyout or “MBO” is the purchase of a company or business by all or some of its existing management from either the parent company or from the private owners.
In some cases the help of an outside institution who takes a share in the new entity (MIBO) may be enlisted, sometimes the new management team will include the employees (MEIBO).
Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management know more about the company than the sellers do.
A management team faced with the possibility of initiating or taking part in a buyout has a unique and exciting opportunity. It is often best placed to formulate a clear strategy to grow and develop the business and can create significant personal wealth for its members in the process.
The opportunity may arise because the parent company no longer considers the subsidiary or division as core to its strategy. Or a company’s majority owners may be looking to exit their shareholding, sometimes the case with a family company when no-one wants to take over.
For individual vendors, MBOs are a tried and tested method of succession planning, ensuring a smooth transition of ownership and creating the best opportunity for continued growth.
For corporate vendors, an MBO is often the quickest and least disruptive way of realising value, providing capital to strengthen a balance sheet or deploy into other business areas.
For many managers, a Management Buyout (MBO) is their first venture as an entrepreneur. It takes courage to leave the relative security and comfort of a management position to face the challenges of ownership and independent accountability. However, on reflection, most managers find that the personal satisfaction of controlling their own destiny is one of the biggest rewards from a Management Buyout.
Buying a company through a Management Buyout can be a shortcut to financial success. The risk is lower, the financing is easier to obtain, and the waiting period for a return on investment is shorter than starting a business from scratch.
Pursuing a Management Buyout is extremely demanding. The pressures on managers, their colleagues, family and friends can be severe, and this is just to complete the deal. The process is, however, a complex one and the assistance of an experienced specialist MBO advisor should ensure that all aspects are taken into consideration and that the process goes smoothly.
An advisor will assess the feasibility of the MBO, and advise on the preparation of a business plan, essential when approaching financial backers. They will identify possible backers and use their experience and contacts to introduce other appropriate professionals such as lawyers and tax advisors. If desired they will help conduct the negotiations with the seller and project mange the whole process.
Once you’ve bought your company, the difficulties and challenges are unlikely to abate as while the management team can reap the rewards of ownership, they have
to make the transition from being employees to owners, which requires a change in mind set from managerial to entrepreneurial. Not all managers may be successful in making this transition.
A management buyout can be attractive for the seller as he can be assured that the future stand-alone company will have a dedicated management team thus providing a substantial downside risk against failure and hence negative press. Additionally, in a case where the management buyout is supported by a private equity fund, the private equity investor will, given that there is a dedicated management team in place, likely pay a more attractive price for the asset.
However, the seller may not realize the best price for the asset sale in an MBO. If the existing management team is a serious bidder for the assets or operations being divested, because the managers have a potential conflict of interest. MBOs are also viewed as good investment opportunities by hedge funds and large financiers, who usually encourage the company to go private so that it can streamline operations and improve profitability away from the public eye, and then take it public at a much higher valuation down the road.
Private equity funds may also participate in MBOs, but their preference may be for MBIs, where the companies are run by managers they know rather than the incumbent management team.