Management BuyoutExplained, Advantages & Disadvantages, and Examples

Lisa Borga

A management buyout refers to a situation in which a company’s management team chooses to coordinate a purchase of either the total or majority stake in the business.

This type of buyout often occurs when a corporation wishes to split off a division in order to streamline or in private companies when the owner chooses to retire.

A management buyout can be attractive to a management team due to the greater ability they may have to benefit from the company’s future growth.

Key Takeaways

  • A management buyout occurs when a company’s management team chooses to buy the company they work for from its existing owner(s).
  • In order to perform a management buyout, a company’s management team will pool their resources in order to raise the capital to purchase all or the majority stake in a company. Often this includes personal capital, debt financing, private equity, and owner financing.
  • The management team of a company may choose to perform a management buyout due to the greater potential to benefit from future growth.

Management Buyouts Explained

In a management buyout, a company’s management team will coordinate a purchase of the majority of the total stake in the business.

This can occur in corporations or private businesses and is often an attractive proposition for buyers and sellers alike.

In such a transaction, both parties know and are familiar with each other in advance, which often allows the process to proceed much more smoothly than when an external party is involved.

The amount of capital involved in a management buyout is often very large, and in addition to the management team’s own personal capital, it will often require an external infusion of capital.

In order to acquire this, the management team may choose to negotiate debt financing or private equity financing.

Lenders often look positively on management buyout arrangements due to the continuity they offer to the operations and management of a company.

A company’s existing clients and customers will often remain with the company as few changes in quality and personnel are expected with the same management team remaining.

Alternatively, the company’s existing owners may agree to finance the acquisition through a note which would be amortized over a period of time in which the acquisition would be repaid through the company’s earnings.

Management buyouts are a preferred way for large corporations that wish to spin off a division or if the management team believes that it can achieve greater growth potential by taking the company private. It is also commonly performed in private companies when an owner retires.

Management Buyouts Vs. Management Buy-Ins

Though they can often be confused with each other, management buyouts are very different from buy-ins. In a management buyout, the internal management of a company purchases the majority or total stake of the company they manage.

In contrast, in a management buy-in, the management team of another company attempts to acquire a company and replace the existing management of a company.

A managed buyout has an advantage over a management buy-in because, in the former, the management team has an understanding of the company’s operations, employees, and customers.

With management buy-in, the incoming management team would have a learning curve in order to gain familiarity with the company’s operations.

Advantages & Disadvantages of a Management Buyout

 

Advantages of a Management Buyout

Large financiers, as well as hedge funds, generally consider management buyouts to be a good investment opportunity and, therefore, often encourage companies to go private.

This can allow these companies to increase their profitability and make their operations more efficient without a lot of public attention.

Then at a later date, the company can go public at a higher value.

In cases where the MBO is backed by a private equity fund, and there is a dedicated management team in charge, they will probably pay well for the asset.

Private equity funds are sometimes willing to get involved in MBOs, but they often prefer MBIs in which the companies are operated by managers they are familiar with instead of the existing management team.

Disadvantages of a Management Buyout

Management buyouts do have advantages, but they also have some disadvantages.

The management team will have the benefits of being owners, but they will need to adjust to this change.

This can be a significant change, and not all managers will succeed at this change.

Additionally, a seller does not always get the best price in a management buyout.

When the current management team is one of the bidders for the operations or assets that are being sold, the managers could have a conflict of interest.

They might even lie about or damage the potential of the assets they want to buy to obtain them at a low price.

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  1. Western Governors University "A Guide to Management Buyouts (MBO) | WGU" Page 1 . August 12, 2022

  2. Harvard Law School "Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?" Page 1 . August 12, 2022