A management buyout (MBO) is a form of acquisition where a company’s existing managers acquire a large part or all of the company.
Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management knows more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company.
Management buy outs are usually brought about because an owner wishes to retire or because a parent company wants to sell a particular part of its business which it no longer sees as central to its future plans.
Selling to the existing managers is often considered a good way of securing the future of the operation and that of its staff because the existing management teams are a known quantity and the current owner trusts them to look after the business.
The existing management teams often have clear strategies of how to grow the company and to make significant personal wealth as part of the process.
The good news is that MBOs have a relatively high success rate as the management team is familiar with the business and can deal with any issues quickly.
Although simple in concept, there is a lot of value at stake in an MBO process, and all of the parties want to maximize their share of the value. Most of the other parties are experts at MBOs and will also employ their own advisers to look after their interests.
A successful management buy out (MBO) needs a combination of factors in place to ensure its success:
1. The team of managers needs to have a spread of skills and talents. It needs someone who understands the ins and outs of a balance sheet (a financial manager or qualified accountant). It needs someone with vision to see what the business could become, given time and investment.
2. The business must be viable. It does not necessarily have to be profitable but it does have to be capable of achieving profit. Often, MBOs take place because managers feel they could do a better job than the existing management.
3. The existing owner of the business must be willing to sell. If he or she won’t sell, there’s no way of taking it over unless the financial backers and shareholders in the business give their approval.
4. At the end of the whole process, an MBO has to achieve a realistic price for the business. If the existing owners are selling because they want to retire, they’ll hold out for the best possible price. So too will most owners except those who are desperate to get some cash in. But bankers and other financial supporters will not pay just any price the agreed valuation has to reflect the potential of the business.