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The MBO Method

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Management Buy-out

Purchase of a business by its own management:

Summary of the MBO Method. Abstract


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:

  1. Sound and well-balanced management team,

  2. Business must be commercially viable as a stand alone entity,

  3. Willing vendor,

  4. Realistic price (Valuation... Discounted Cash Flows, Net Asset valuation, Price Earnings ratios),

  5. Buy-out must be capable of supporting an appropriate funding structure.

The typical steps in an MBO process are:
  • Agreement in the management team as to who will become the managing director;
  • Appointment of financial consultants;
  • Assessment of the suitability of the buy-out;
  • Approval to pursue the MBO;
  • Evaluation of the seller's asking price;
  • Formulation of business plan(s);
  • Selection of equity advisors and obtaining written offers;
  • Selection of legal consultants;
  • Selection of lead investor;
  • Negotiation of best equity deal;
  • Negotiation of purchase of the business;
  • Selection of auditors.
  • Implementation of a due diligence test;
  • Obtaining finance and other equity investment;
  • Preparation of legal documents;
  • Legal ownership achieved.

T I P : Here you can discuss and learn a lot more about Management Buy-outs/a>.

Compare with Management buy-out:  Leveraged Buy-out  |  Acquisition Integration Approaches  |  Core Competence  |  Outsourcing

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