WHAT IS A MANAGEMENT BUY-OUT (MBO)?
A Management Buy-Out is a kind of transaction through which the management team of a certain company, purchases the assets and the operations of the company they’re managing. Most of the time, the management team takes full control and ownership, using their expertise to grow the company and drive it forward.
How Does a Management Buyout (MBO) Work?
For example, Company ABCD is a publicly listed company where management controls 35% of the company’s stock and the remaining 65% is stock available to the public. Under an MBO, management will arrange to purchase enough shares of the outstanding stock from the public so that they end up with a controlling interest of at least 51% of the company’s total shares.
What makes a successful MBO?
A company with a good track record of profitability;
Good prospects for the company without high-risk factors;
A strong committed management team with a mixture of skills;
A vendor who is willing to explore a sale to the management team and who will accept a realistic price;
A deal structure that can be funded, and supported by the future cash flows of the company.
Importance of Management Buyout (MBO)
The primary difference between a management buyout and any other type of acquisition is the inherent knowledge and expertise of the buyers compared with the sellers. The buyers (management) will usually have more knowledge of the company and its prospects than the sellers. In most scenarios, the sellers rely on the input of management regarding the future of the company to help set the selling price. Here, the advisors become the buyers. In this scenario, the sellers are at a clear disadvantage.
For instance, the management, as buyers, may exploit their advantageous position by manipulating the stock price through certain types of stock sales so that they will achieve a lower buying price. They may also try to lower the purchase price of the company by taking aggressive write-offs to show less net income in the period leading up to the purchase. The sellers therefore must use caution about the buyers in an MBO.
Likewise, the management as buyers must also exercise caution concerning the financiers they bring to assist with the purchase. Venture capitalists, for example, may have different goals than the company’s management team regarding the expected timing and nature of the return on investment (ROI) in the company. In a case where a venture capitalist investor has gained a large enough stake in an MBO, the management who purchased the company may have less control over how to actually manage the company.