What Is A Management Buyout (Explained: All You Need To Know)

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What Is A Management Buyout

A management buyout, or MBO, is a business transaction where a company’s management team acquires the business from its current owners.

In other words, those who manage the business acquire the business from those who own the business.

Management buyouts can be an interesting acquisition opportunity for business managers having the experience and skills needed to successfully operate a business.

It may also be an interesting avenue when the current management team does not share the same views as the current shareholders making it enticing for the managers to buy them out.

A management buyout is a type of leveraged buyout as in most cases, the company’s management team will use significant levels of debt financing to acquire the business from its owners.

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Why Are There Management Buyouts

The primary reason why you see management buyouts is for a company’s management team to take a company private, turn things around, and bring the company back to profitability.

Those who manage a company are typically in the best position to assess its true potential of a company.

In some situations, a company’s management team may believe that managing the company and owning it can result in greater value for the shareholders.

As such, the current management team acquires the company’s assets and operations in an effort to produce greater value for the shareholders.

Another important reason why you may see a management buyout is when a large company wishes to sell a business division that may not be profitable or be part of its core business.

In such cases, the managers of the undesirable business division will acquire that portion of the business to operate it as a standalone business.

How Does A Management Buyout Work

A management buyout, as the name suggests, is when a company’s managers acquire the business from its current owners.

When the business owners have an interest in selling the business, they can choose to sell to any interested third party.

In some situations, the acquirer of the business ends up being those individuals in charge of running the business (the management team).

Typically, the company managers will finance the acquisition by using personal capital, getting financing from private equity firms, and potentially seller-financing.

By owning the business, the company’s management team will benefit the most the more the company is profitable.

As a result, management buyouts can represent an opportunity for a company’s management team to reap the reward of company ownership the more the business is able to generate profits.

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What Is The Management Buyout Process

A management buyout is a transaction between a company’s management team and the company’s owners where the managers buy out the owners.

Management buyouts can happen in any industry and in a company of any size.

Very often, management buyouts take place when the owners wish to retire and sell their share in the business, when a company wants to split up a division, department, or segment away from its core business, or when it’s more profitable to take the company private to turn things around.

The management buyout process typically involves the current company managers and business owners agreeing on the purchase price.

Typically, since the company managers do not have enough capital to buy out the company, they’ll need financing from external sources like banks and private equity firms.

When a private equity firm is involved and depending on how much they are looking to invest, they may perform thorough due diligence.

Ultimately, if the due diligence does not reveal any deal-breaking issues, the managers get the funding they need to acquire the business.

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Pros And Cons of Management Buyouts

The main advantage of a management buyout is that a company’s management team can acquire the business, turn things around, and benefit from the higher company valuation down the road.

Many private equity funds and hedge funds tend to finance management buyouts as they can take the company private, bring it back to profitability, and exit by taking the company public again in the future.

Another advantage of management buyouts is that the current shareholders can potentially sell the company at a premium over the company’s current market value.

In many cases, private equity firms will offer a higher price to help the management team acquire the business when there is an opportunity.

On the flip side, the main disadvantage of management buyouts is that the company management team ends up in a conflict of interest when looking to buy the business.

As a result, they may not run the business effectively to deliberately lower the company valuation so they can eventually pay a lower purchase price.

Also, the company’s management team must be able to transition from being employees dealing with one another to business owners having to deal with one another.

In some cases, this transition may not work as originally expected.

Management Buyout Financing

In most management buyouts, the company managers will need financing to be able to acquire the business.

It’s rare that the management team has enough financial resources to be able to entirely fund the cost of acquisition.

For this reason, you may see management buyouts financed through debt, seller, private equity, or mezzanine financing, among other options.

Debt financing is when the managers borrow the funds needed to purchase all or part of the business.

Seller financing is when the business owners agreed to finance the acquisition by issuing a note amortized over a certain period of time.

Private equity financing is when a private equity fund provides the capital in exchange for shares in the business. 

Mezzanine financing is a type of financing where there’s a combination of debt and equity financing.

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Management Buyout Examples

One notable example of a management buyout in the United States is the acquisition of Dell by Michael Dell back in 2013.

In essence, Michael Dell acquired the shares in Dell for a total of $25 billion allowing him to take the company private so he could turn things around.

Another example of management buyouts is that of the Virgin Group.

In fact, the Virgin Group underwent several management buyouts over the years.

In 2007, Virgin Megastores was sold to its managers and became Zavvi.

In 2008, Virgin Comics underwent a management buyout to become Liquid Comics.

Then, Virgin Radio underwent a management buyout to become Absolute Radio.

Takeaways 

So there you have it folks!

What is a management buyout?

In a nutshell, a management buyout or MBO is a corporate finance transaction where a company’s senior management team acquires the business from its shareholders.

Management buyouts can be interesting for the company managers who have a unique vantage point in the company’s business operations.

Being involved in the day-to-day business operations, the company’s management team may see that there’s an opportunity to grow the business and profit from the growth as a business owner.

Now that you know what is a management buyout and how it works, good luck with your research!

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