What Is a Management Buyout and the Benefits of It?

Management buyouts (MBOs) have become increasingly common in recent years, especially in small business acquisitions, and particularly among tech companies. A management buyout is a business acquisition strategy where the management team of a company buys the firm, often in combination with an alternative lender. In many cases, MBOs are supported by debt financing, whereby managers with limited capital can minimize their initial outlay and maximize their returns.

Management teams often partner with alternative lenders, such as business development companies (BDC)s, to finance buyout deals. While traditional lenders like commercial banks may be a go-to lending source for larger companies with consistent cash flow and favorable debt-to-income ratios, small and middle-market businesses often don’t meet those narrow requirements. Instead, alternative lenders are typically a much more attractive option thanks to their flexibility, speed, and easy application process.

Management Buyouts (MBOs) Explained

How does a management buyout work?

A management buyout works through financial and legal procedures, most often in one of two scenarios. The first is an exit strategy, in which large corporations want to sell the business or divisions that are no longer part of their core business. The other is because of owner retirement, and this is common in private businesses when an owner wants to move on to something new.

A management buyout takes about six months on average, though it can take longer for larger firms and corporations. Teams continue to maintain normal business responsibilities and functions while the transaction and transfer of ownership take place. The manager buyout acquisition process typically follows these eight steps:

What is a management buyout?

An MBO is a transaction where a companys management team buys the assets and operations of businesses they manage. With this corporate activity, the management team takes full control and ownership, buying out the previous owner and often using their expertise to grow the company. Management buyouts are often appealing because there’s more reward and control associated with becoming owners of a business compared to being employees, and it offers a chance to streamline operations and improve profitability by going private.

How do teams finance management buyouts?

A management buyout has many pros for the buyer and seller of a company. For example, a management buyout can help secure jobs that new owners otherwise might eliminate with other exit strategies or sales of the company. Other benefits of an MBO include:

Examples of management buyouts

Here are two example scenarios of a management buyout for both a small business and a large corporation:

A small business owner

A car repair shop has been in the family for generations, though now the current owner wants to retire and doesn’t have an interested relative who would like to take over. A senior mechanic who’s worked at the shop for decades is interested in buying the business, and the owner feels comfortable that the reputation and values of the shop would continue in their hands. Together, the two work as seller and buyer to coordinate a management buyout on a small scale.

A large corporation

A publicly traded technology manufacturing company a business owner founded is losing revenue and profits. The founder and chief executive officer (CEO) initiate a management buyout to take the company from public back to private, paying shareholders billions of dollars in a financial buyout payment. Through the management buyout process, the CEO regains control over the direction of the business without influence from investors and repositions the tech company into the future, making changes that save costs and increase revenue and profit.

FAQ

What does management buyout mean?

A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout is appealing to professional managers because of the greater potential rewards and control from being owners of the business rather than employees.

What is an example of management buyout?

One particularly well-known example of a management buyout came in 2013, when Michael Dell, founder of the eponymous computer company, paid $25 billion to take it private, with the help of a private equity firm.

What are the advantages of a management buyout?

Management Buyouts Are Simple And Easy To Arrange

This means that MBO’s are usually quicker, cheaper and easier. The contracts and sales process itself for MBO’s are also usually much simpler as the buyers already have intimate knowledge of the company and so minimal due diligence is required.

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