What is a Management Buyout?
What is a Management Buyout?
A management buy-out (‘MBO’) is an exit strategy for shareholders, allowing the company to be sold to its management team.
An MBO takes place when the owner would like to retire and hand the business on to the next generation of management. It can also be used when a company wants to sell parts of its business to a management team.
Key Consideration
- Is there a strong management team? There’s no point selling to a management team that is not yet ready, unless the vendors are prepared to stay involved for a significant period of time.
- Is there a need to hire key managers from outside the business? An MBO can be enhanced by hiring one or two key senior people to supplement the existing management team (sometimes called a management buy-in, or partial buy-in).
- Does the owner have realistic price expectations? Since the transactions are often completely financed from the profits of the business, it is essential that the price set is reasonable.
- Is there a record of profitability from the company; will this company succeed? If the transaction is to be financed from future profits, we need to be as certain as possible that the company will thrive under the new management team.
- Should the management team put up an amount of ‘Hurt Money’? The transaction does not require the management team to put up any initial cash, but many vendors feel that it is important for the managers to have some ‘skin in the game’, so that they have a reasonable sum at stake that is dependent on the success of the company.
