A management buyout (MBO) is the purchase of all or part of the target company by a team of existing management and executives in a continuation of their role. Finance is often provided by a Private Equity firm and involves large amounts of leverage. Most of the time, the management team takes full control and ownership, using their expertise to grow the company and drive it forward.
This method of going private first arose around 30 years ago and has increased in popularity since. Management buyouts, or MBO’s can occur in any industry or business and have steadily grown in size. They are in effect Leveraged Buyouts that involve management in a role continuation.
Advantages and Disadvantages of a Management Buyout
Advantages of management buyouts can be observed for both the seller and the buyer
- A simple way for existing owners (usually the shareholders) to find willing and knowledgeable buyers.
- They can be used to break a particular department away from the core business, to allow owners to dispose of their interest, or even to save a business from administration.
- For the buyers, it is usually the easiest, quickest and least risky way to step up into an ownership role. Employees and management are given the opportunity to step up and progress their careers. This allows individuals to fulfill their ambitions of calling the shots, of taking home a larger slice of the profits.
- The alternative, to start a business from scratch, contains many more unknowns and can take longer to see positive returns.
But just as an MBO can be the perfect solution in one situation, there are also many pitfalls which would make a management buyout unsuitable for another.
- This changes the dynamics, introducing extra debt or spreading equity thinner.
- Repayments and dividends eat into profits and squeeze the margins.
- Many outside investors will also want some form of control over the business.
- While this may simply be a non-executive director, the MBO team will soon find they’re still answerable to somebody after all.
