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Essentially, a management buy-out
(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 an equity
interest in their business, sometimes a controlling stake, for a
relatively modest personal investment. The existing owners normally sell
most or usually all of their investment 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.
Typical
reasons
for the purchase of a business by its existing management include:
-
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'
-
Parts of
acquisitions that are not wanted
-
In case of a
family business: succession issues through retirement of the
owner
-
The
management team stand 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? Typical criteria are:
-
Sound and
well-balanced management team,
-
Business
must be commercially viable as a stand alone entity,
-
Willing
vendor,
-
Realistic
price (Valuation... Discounted Cash
Flows,
Net Asset valuation, Price Earnings ratios),
-
Buy-out must
be capable of supporting an appropriate funding structure.
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