What is a Management Buy-Out? Description
Essentially, an 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 equities in
their business, sometimes a controlling stake, for a relatively modest personal
investment. The existing owners normally sell most or usually all of their
investments 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.
Reasons for the purchase of a business by its existing management
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Certain parts of an organization are no longer seen as a
Core Competence / no core activity
by its parent company.
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A company is in financial distress and 'needs the cash'. Compare:
Turnaround Management
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Parts of acquisitions that are not wanted.
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In case of a family business: succession issues through retirement of
the owner.
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The management team wants 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
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Speed. An MBO can be much quicker than a trade sale.
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Strategic considerations. For example the selling party may not
wish competitors to acquire control.
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Confidentiality. The selling party may not wish to let competitors
have access to sensitive information that would be disclosed during a trade
sale process.
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Familiarity. With an MBO the selling party can continue to deal
with a management team with whom it has an established relationship.
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Pricing.
Feasibility of a Management Buy-out? Criteria
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Sound and well-balanced management team.
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Business must be commercially viable as a stand-alone entity.
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Willing vendor.
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Realistic price (Valuation... Discounted Cash
Flow, Net Asset valuation, P/E ratio).
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Buy-out must be capable of supporting an appropriate funding structure.
Typical steps in a management buy-out process
- 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.
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Management Buy-out Special Interest Group
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Entrepreneurial Orientation in Management Buy-Outs and the Contribution of Venture Capital
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