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Management Buyout (MBO) Definition – Explanation – Example

What Is a Management Buyout (MBO)?

Management BuyoutA management buyout (MBO) is a transaction in which the management team of a company buys the assets and operations from the previous owners. Sometimes, managers pool their resources.  However, the buyout is frequently financed using a combination of equity and debt financing. Managers who aspire to be business owners rather than workers are typically drawn to the notion of an MBO. MBOs are a common tool for small business handovers.  However, they are also useful for taking public firms private in order to remodel operations, simplify operations, and boost profitability. They can also be used to split divisions of major corporations into distinct enterprises.

The management team normally combines personal resources to provide funds for the MBO while obtaining debt financing.  The loan is typically done through a business development firm or another external lender. Seller financing is often a component and frequently included as part of the MBO deal. The team’s personal investment demonstrates their motivation and individual commitment to expand and grow the company.

An MBO is frequently a solid option for a successful company that does not have a clear succession plan.  It enables a smooth transfer to individuals who know the business and are best positioned to ensure its success. Companies, particularly small enterprises, frequently fail to thoroughly assess their liquidity alternatives. Selling to management decreases the danger of disclosing secret information.  Further, it assures a knowledgeable, experienced buyer will continue the operations.  And, generally with a high level of dedication to the company’s continued success.

Management Buyout (MBO) – A Closer Look

A management buyout (MBO) is a popular exit strategy for a major organization looking to sell a division that isn’t vital to its business. Also, it is a suitable option for private companies whose owners are looking to retire. The financing necessary for an MBO is frequently sizeable. Typically, it is a combination of debt and equity obtained from the purchasers, lenders, and, in certain cases, the seller. Management reaps the benefits of ownership following an MBO.  However, they must transition from workers to owners.  This entails much more responsibility and a higher risk of personal loss.

An MBO is also compelling for management groups as buyers. Entrepreneurs want to earn more direct financial rewards for the hard work they are putting into growing the value of the company. A management team that pursues an MBO is confident they can use their experience and expertise to grow the business and improve its operations.

MBO Example – Dell Inc.

MBOs can take place when a firm decides to go private in order to increase its profitability and prospects. One well-known example of a management buyout occurred in 2013. Michael Dell agreed to take Dell Inc private for $24.4 billion in the largest leveraged buyout since the financial crisis.  Dell combined with Silver Lake private equity firm and Microsoft Corp to try to turn around the faltering computer manufacturer without the scrutiny of Wall Street.  Following the MBO, Michael Dell was left with a 75% share in the world’s third-largest computer maker. Dell’s projected value in 2018 was $70 billion, approximately three times its value at the time of the MBO. It was reintroduced to the public again in December of the same year.

Management Buyout – Reasons

There are compelling motivations for both the seller and buyer to execute an MBO.  For a confident management team, an MBO is often the easiest, quickest, and least risky way to take a meaningful ownership stake in a business. In an MBO, the buyers have had an inside look at the asset they are buying.  This reduces the risk of the investment. A solid management team will want to invest in themselves and by investing in the company they are running.

MBO Reasons

  • Owner wants to retire or cash out – An MBO provides peace of mind to an owner who wants to retire. He can cash out while passing the firm on to a group he knows and trusts. This is especially significant for a family firm or a company that employs a big number of people in a small town.  The history of a company and the legacy it leaves behind is extremely important in these instances.
  • Protect confidential information – The seller benefits tactically from the management buyout process as well. Dealing with firm management lowers the owner’s chance of sensitive information being leaked during the selling process. Furthermore, the closing procedure may be dramatically sped up.  This is because the buyers, who have been operating the firm, are familiar with the operation and assets.
  • Public to private – MBOs can also be appealing to public corporations utilizing an MBO to go private. Or, they can sell or divest a segment that is no longer vital to their business or of interest to their shareholders. As a private entity, management can conduct a long-term turnaround outside of the public spotlight.  Also, management is free to enact its own policies without the worry of shareholder backlash.
  • Stakeholders benefit – Buyers and sellers are not the only beneficiaries of an MBO. This type of buyout is popular with lenders, who frequently assist in financing these deals.  Additionally, customers, suppliers, and staff all stand to benefit. The current management team and operations will remain in place.  These numerous stakeholders may be assured that the company’s activities and services will continue uninterrupted.

Management Buyout (MBO) vs. Management Buy-In (MBI)

A management buyout (MBO) differs from a management buy-in (MBI), in which an external management team buys a firm and replaces the current management team. It is also distinct from a leveraged management buyout (LMBO), in which the purchasers use the company’s assets as collateral for loan financing. An MBO has a benefit over an LMBO in that the company’s debt burden may be reduced, allowing it more financial flexibility.

  • Management buy-in (MBI) – A management buy-out is the acquisition of a company by its current management team. A management buy-in, on the other hand, is the acquisition of a firm by an incoming management team. The advantage of an MBO over an MBI is that the present management has a far greater grasp of the firm and there is no learning curve required.  This would not be the case if it were controlled by a new group of managers. Management buyouts (MBOs) are done by management teams that desire to get a financial return for the company’s future performance more directly than they would as employees.
  • Leveraged Buyout (LBO) – A leveraged buyout is the acquisition of another firm using a large amount of borrowed money (bonds or loans) to cover the acquisition costs. Along with the assets of the acquiring firm, the assets of the company being purchased are frequently used as collateral for loans. An LBO is structured when a buyer lacks the necessary funds and borrows a portion of the acquisition price against the target company’s assets (receivables, equipment, inventory, real estate) or cash flow (future cash).

Bottom Line

Hedge funds and investment banks consider management buyouts (MBOs) as attractive investment opportunities.  Also, they frequently advise the firm to go private.  This allows management to simplify operations and enhance profitability away from the public eye.  Ultimately, they can go public at a much higher price later on. Often, a management buyout (MBO) is backed by a private equity fund.  The fund will most likely pay a fair price for the business.  This is because they know there is a dedicated management team in place.

However, there are some disadvantages to the MBO structure. While the management team may realize the benefits of ownership, they must first convert from workers to owners.  At the very least, this requires a shift in attitude from managerial to entrepreneurial. This change may not be successful for all managers. In addition, in an MBO, the seller may not receive the optimum price for the asset sale. If the current management team is a serious bidder for the assets or activities being sold, the managers may be in a position to be biased. For example, they might underestimate or purposefully undermine the future prospects of the assets for sale.  This would enable them to purchase the business at a lower overall valuation.

Up Next: IFC News – What Is International Finance Corporation?

IFC NewsIFC news refers to global media coverage of International Finance Corp., an affiliate of the World Bank. The organization provides financing for private-enterprise investment in developing countries across the globe through loans and direct investments.  International Finance Corp. is affiliated with the World Bank and offers advisory services to stimulate the growth of private entrepreneurship.  In particular, it focuses on countries that may lack the requisite infrastructure or liquidity for enterprises to acquire finance.

The International Finance Corporation (IFC) was founded in 1956 as a part of the World Bank Group with the goal of investing in economic growth. It bills itself as the world’s largest development organization concentrating on the private sector in underdeveloped nations. Further,  IFC aims to warrant that private firms in developing countries have access to markets and funding. For example, IFC’s most current stated aims include developing sustainable agriculture and increasing access to financing for small enterprises.  This is in addition to continuing to support infrastructure upgrades and promoting climate, health, and education policies. The International Finance Corporation (IFC) is administered by its 184 member countries and is located in Washington, D.C.

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