An MBO, or management buyout, 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.
For a company undergoing a change in ownership, an MBO is advantageous in that other employees are less likely to be concerned and existing clients and trading partners, or stakeholders can remain at ease in the continuity of the business. In this instance, the quality of the management will be a critical factor in the potential future success of the company. Investors will scrutinize the skills, experience, knowledge and credibility of the management team in addition to the business plan.
This method of going private first arose around 30 years ago and has increased in popularity since. MBO’s can occur in any industry or business and have steadily grown in size. For more information, see Management Buyout
Funding an MBO
Only in very rare instances will a management team will have sufficient funds to buy the company on their own. Therefore, additional finance will be required and may come from any combination of the following sources
- Management contribution – the management team will still be expected to introduce personal funds, thus providing confidence to invetors and showing commitment to the deal
- Asset finance – leveraged against the assets of the company
- Bank debt – banks often also provide a medium term cash flow term loan
- Private Equity (PE) – a major source of financing with many funds operating in this space
- Vendor loan notes – vendors themselves may occasionally help fund the transaction if the above source are not sufficient
