Management buyout (MBO) - What is a management buyout?

A management buyout (MBO) occurs when the existing managers of a company pool their resources in order to purchase assets that effectively transfer the ownership of the business

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For some business owners, their exit strategy involves allowing the current management of the business to take over ownership by purchasing a majority share.

A management buyout differs from a management buy-in (MBI) wherein an external management group purchases a majority ownership of the business. It also differs from other types of mergers and acquisitions in that the business is taken over by individuals that are already part of the company.

Why choose an MBO

Whether you’re part of the buying or selling side, there are a number of reasons that might contribute to the decision to pursue an MBO. If an MBO occurs with a business that is already public, it is typically advised that the business goes private to get things in order.

An MBO from the seller side

As the current owner of the business, if you’re looking for an exit strategy due to a move towards retirement or perhaps a new venture, an MBO can be an easy and reliable way to bow out of a current business.

When the management team takes over the company, they are typically knowledgeable in the company’s history, background, and have an understanding of what it takes for the day-to-day operations.

However, because the management team possesses such knowledge, it is also possible in some circumstances that the value of the business (in other words, the eventual purchasing price) is manipulated by management before the buyout in order for them to lower the price, especially in the event of an auction wherein other potential buyers could also be dissuaded.

An MBO from the management side

An MBO can be an excellent way to become the owner of a business that is already up and running. This allows you to bypass the struggle that can come with launching a new business from scratch. It also means that, as a manager, you’re likely very familiar with the business and ready to step into a larger role.

Moving into an ownership position means not only that you have the opportunity to implement your own strategies to growing the business, it also provides you with an added level of job security.

The MBO process

An MBO can easily become a lengthy (usually around 6 months) and complicated process. In the meantime, it is obviously the goal that the business continues to run as usual. Most MBOs follow certain steps in order to complete it as efficiently as possible. These include:

• Determining and agreeing on a price. It is not uncommon for an outside party to come in to evaluate the business.
• The management team gauge how much they will be able to pay.
• A thorough financial evaluation of the business is undertaken to provide information about future earnings as well as return on investment and risks for the investors.
• The management team looks into funding options depending on the purchase amount and what they can pay.

When an MBO occurs, it’s common for the management group to take out loans in order to purchase the assets and operations of the business. However, they must also buy a specified portion of the business outright.

Because this type of transaction is generally considered risky by banks, it can be somewhat challenging to secure loans to back the remaining amount needed. That said, MBOs occur regularly, so it is certainly possible.