Complete Guide to Management Buyouts: Overview & Advantages

Management buyouts occur when an existing management team purchases a controlling stake in the business from its owner or founder. When considering a management buyout, it is important to understand the advantages and disadvantages of the transaction, as well as how to best ensure its success. We’ll cover these issues and more in this guide to management buyouts.

What is a management buyout?

A management buyout (MBO) is a form of acquisition in which the current managers of a company purchase all or a majority of the assets from the existing owner of the company. This type of transaction allows existing management to take control and ownership of their business and gain greater autonomy while often providing more attractive terms than if the business had been sold to an outside buyer.

MBOs can offer many benefits for companies, including continued control of and greater autonomy over their operations, improved financial performance with a skilled management team taking control of the business, and increased incentives for management to continue growing the company. Additionally, MBOs are often less expensive than other types of acquisitions, as there is no need to pay an external buyer’s costs. 

What does a management buyout look like?

Typically, a management buyout is structured as a leveraged management buyout, in which the management team borrows money to finance the purchase of the company. The borrowed funds are then used to pay for a portion of the deal as well as other expenses such as debt transaction costs and other transaction expenses. 

The remainder of the purchase price is typically sourced from equity, which the management team can raise through a variety of sources such as private equity firms, individual investors, or personal funds. Once the purchase has been completed, the new owners are responsible for repaying the debt and managing their newly acquired business.

How is a management buyout financed?

The management team will likely be required to contribute some amount of their own capital as equity in the deal in order to finance the buyout. MBO finance can materialize as multiple different types of financing. Here are some examples of what it may look like:

Bank financing

A common way to finance a management buyout is through a traditional bank loan. Although some banks may not offer this type of financing, that doesn’t mean it’s impossible. Banks with an existing relationship with the company may be more likely to lend funds.

Seller financing

The seller or existing owner of the business may finance the sale through a note, allowing the new owners to pay from their earnings over the course of several years. Seller financing may offer tax benefits to the seller as well. 

Private equity financing

When a bank loan is not an option, or a management team needs additional funding, they may turn to private equity financing instead. These firms provide capital to the management team in the form of either debt or equity capital; in exchange, they will be repaid over time (for debt) or will own a portion of the company (for equity). 

Mezzanine financing

Mezzanine financing is a type of subordinated debt or preferred equity financing, which is more senior than common equity in the capital structure of the business but subordinated compared to senior debt financing. Mezzanine capital is often more expensive than traditional debt financing. 

The advantages of a management buyout

There are a number of advantages that can be gained from completing a management buyout. These include: 

• Continued management control and consistent company culture: When existing management completes a buyout, they gain additional control and ownership of the business, but often there is no abrupt transition for customers or employees. Company culture will often not change as well.
• Increased incentives for management: By taking ownership of the company, existing management is incentivized to continue growing the business and increasing its value, as they will receive a larger share of any future profits. 
• Cost savings: MBOs often provide more attractive terms than if the business had been sold to an outside buyer, as there is no need to pay external fees and costs. 
• Greater access to capital: By taking control of their company, existing management may be able to gain access to additional sources of capital, such as venture capital or private equity funding.

Ultimately, a management buyout can be a beneficial and cost-effective way for existing management to exercise greater control of their business and increase its value. 

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The steps of the management buyout process

The company buyout process requires a number of steps that must be followed in order to ensure the success of the transaction. These steps include: 

• Evaluating the risks and potential rewards of an MBO
• Assessing the time, financial, and personnel commitment required
• Speaking with existing owner and discussing the desire to complete the MBO
• Proving financial and operational credibility with existing ownership
• Writing a business plan
• Negotiating the sale
• Putting together the financing
• Completing the due diligence process, including a possible business appraisal
• Closing the deal and becoming the new owners

Pre-offer

Management teams should ensure that they plan ahead and anticipate any potential issues or challenges before making an offer. This includes assessing the current state of the company, conducting market research, and developing a detailed financial model to determine the value of the business. Planning ahead can help minimize risks and maximize the chances of success. 

Only once this work is done should the current owners be approached with an offer to purchase the business.

Post-offer

Assuming the management team is able to agree to terms with the seller, the management team should begin the due diligence process as soon as possible. Management teams should also be preparing for the transition process after the buyout is complete. This includes evaluating current operations, restructuring the business, and implementing new strategies to ensure continued success.

Common issues with management buyouts

Although management buyouts can be a boon to business, there are a number of potential issues that can sink a deal or put a company in jeopardy post-takeover. These include: 

• Lack of experience: Management teams may lack the necessary ownership experience and industry expertise to successfully execute a buyout. This can lead to delays or costly mistakes. 
• Legal issues: The legal process surrounding a management buyout can be complex and may be difficult to navigate without proper guidance in planning the management buyout structure. 
• Difficulties between partners: A lack of defined leadership and different expectations among the partners involved in the buyout can cause internal strife.
• Too much debt: When a deal is financed with a great deal of debt, it sets a company up for failure by reducing the margin of error.

Ways to overcome common issues with management buyouts

Management teams should take the following steps to ensure a successful buyout: 

• Identify and address any potential issues before entering into negotiations. 
• Put together a team of experienced professionals who have expertise in all aspects of the transaction, including legal, financial, and operational. 
• Develop a detailed business plan that outlines goals and strategies for the future. 
• Ensure that all due diligence is complete and all legal requirements are met before finalizing the purchase. 
• Create a budget and plan to ensure funds are allocated efficiently and effectively. 

Real-world examples of management buyouts

Management buyouts can provide an effective way for a company’s management team to acquire the business and gain full control. Here are some real-world management buyout examples worth examining:

• In 2013, Michael Dell paid $25 billion to take the company he founded, Dell Computers, private.
• In 2020, Michael Lines of PricewaterhouseCoopers led an MBO of the company’s fintech division and rebranded it as LikeZero.
• Also in 2020, CEO of Fuse Media, Miguel Roggero, led an MBO after the company had fallen into the hands of private equity firms and hedge funds post-bankruptcy.

The bottom line

By understanding all aspects of a management buyout and taking the necessary steps to ensure its success, teams can gain full control of their business and maximize their chances of achieving long-term growth and profitability. With careful planning and preparation, a successful management buyout is within reach.