Management Buy-out

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What is a Management Buy-Out?

Essentially, an MBO is the purchase of a business by its existing management, usually in cooperation with outside financiers. Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire equities in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners normally sell most or usually all of their investments to the managers and their co-investors. Often the group of managers involved establish a new holding company, which then effectively purchases the shares of the target company.

Reasons for the purchase of a business by its existing management

• Certain parts of an organization are no longer seen as a Core Competence / no core activity by its parent company.

• A company is in financial distress and 'needs the cash'. Compare: Turnaround Management

• Parts of acquisitions that are not wanted.

• In case of a family business: succession issues through retirement of the owner.

• The management team wants to gain independence and autonomy, a chance to influence the strategy and future direction of the company and the prospect of a capital gain.

Attractiveness of the Management Buy-out approach to a seller

• Speed. An MBO can be much quicker than a trade sale.

• Strategic considerations. For example the selling party may not wish competitors to acquire control.

• Confidentiality. The selling party may not wish to let competitors have access to sensitive information that would be disclosed during a trade sale process.

• Familiarity. With an MBO the selling party can continue to deal with a management team with whom it has an established relationship.

• Pricing.

Feasibility of a Management Buy-out? Criteria

1. Sound and well-balanced management team.

2. Business must be commercially viable as a stand-alone entity.

3. Willing vendor.

4. Realistic price (Valuation... Discounted Cash Flow, Net Asset valuation, P/E ratio).

5. Buy-out must be capable of supporting an appropriate funding structure.

Typical steps in a management buy-out process

1. Agreement in the management team as to who will become the managing director.
2. Appointment of financial consultants.
3. Assessment of the suitability of the buy-out.
4. Approval to pursue the MBO.
5. Evaluation of the seller's asking price.
6. Formulation of business plan(s).
7. Selection of equity advisors and obtaining written offers.
8. Selection of legal consultants.
9. Selection of lead investor.
10. Negotiation of best equity deal.
11. Negotiation of purchase of the business.
12. Selection of auditors.
13. Implementation of a due diligence test.
14. Obtaining finance and other equity investment.
15. Preparation of legal documents.
16. Legal ownership achieved.

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Information Sources Various sources of information regarding Management Buy-out. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Entrepreneurial Orientation in Management Buy-Outs and the Contribution of Venture Capital Entrepreneurship, MBO This paper by Hans Bruining and Mike Wright focuses on the development of entrepreneurial orientation (EO) after a manag... Introduction and Summary of Management Buy Out (MBO) Initial Understanding of Management Buy Out Management Buy Out is a term for a transaction where the management team (not necessary shareholders) buy out a third pa... Internationailization of MBOs: Firm Strategies and Venture Capitalist Contribution Management Buyouts Multivariate statistical analysis is utilized to explore the association between firm strategies, contributions made by ...

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