A Management Buy-Out can be an effective way of solving company succession issues to the satisfaction of both business owners and incumbent management teams.
What is an MBO?
A Management Buy-Out (MBO) is a form of company acquisition where the existing management team acquire a significant part or all of a company from either a parent company or private owners.
Why opt for an MBO?
Business owners can benefit from an MBO as there is a readily available buyer, in the form of the management team.
For management, an MBO will likely increase the reward they take from a company beyond what they what have received as employees only, and offers the opportunity to implement their own vision and strategy to grow the company.
How are MBOs financed?
It is unusual for management to have the resources available to fund the outright purchase of a company themselves. Traditional debt funding could be sought from a bank, but MBOs are often viewed as high risk and management normally have to invest an element of their own capital which is significant to them personally.
Private Equity houses offer an alternative funding source but will take a share in company equity. The common aims of investors and management, such as profitability and company growth, can lead to a strong partnership, however PE backers will normally have a 3-5 year exit plan, compared to the long term scope of management.
Less frequently the seller will finance the MBO in the form of delayed payment. This comes with significant risk to the seller who will only receive money after giving up control of their company.
When are MBOs used?
There is never a wrong time to think about an MBO, but clearly the right conditions, including a motivated management team and willing seller, are required.
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