What is a management buyout (MBO) and how does it work?

What is a management buyout (MBO)?

A management buyout (MBO) is a type of acquisition in which a company’s existing management team purchases the business from its current owner or owners. This type of transaction can be an attractive option for business owners who are looking to sell their company, as it allows them to retain control over the sale process and potentially negotiate more favourable terms than they might receive from external buyers.

What is the MBO process?

The process of a management buyout typically involves several key steps. First, the management team must identify the specific assets and liabilities that it wishes to acquire and negotiate a purchase price with the current owner or owners. This process often involves the use of financial advisors, funders, lawyers, and other professionals to ensure that the terms of the transaction are fair and reasonable.

Once the purchase price has been agreed upon, the management team will typically need to secure financing to fund the acquisition. This can be done through a variety of sources, including personal funds, bank loans, private equity investment, or a combination of multiple sources. There is often a deferred consideration element. It is important for the management team to carefully consider the terms and conditions of any financing they secure, as these can have a significant impact on the long-term success of the MBO.

Management buyout positives

There are several potential advantages to a management buyout for both the seller and the management team. For the seller, a MBO can offer the opportunity to sell their business to a trusted group of employees who have a deep understanding of the company’s operations and culture.

This can help to ensure that the business continues to thrive after the sale and that the seller’s legacy is preserved. In addition, a MBO may offer the seller the opportunity to negotiate more favourable terms than they might receive from external buyers, such as a higher purchase price or more favourable payment terms as the buyer may see the purchase as less risky than an external buyer would. This is perhaps because they have been a part of the business and understand the intricacies specific to the business, hope it works and already understand its potential.

For the management team, a MBO can provide the opportunity to take control of a business they fully understand and shape its future. It can also offer the potential for financial gain, as the management team will typically have a large stake in the business after the acquisition. In addition, a MBO can provide the management team with the opportunity to develop their leadership skills and gain valuable experience in running a business without having to start their own business from scratch and in a business, they are already succeeding in as an employee. It is also more likely to result in greater stability for employees, suppliers and customers.

What Is an Example of a Management Buyout?

One real-world example of a management buyout (MBO) is the acquisition of the UK-based company JCB by its management team in 2007. JCB is a leading manufacturer of construction and agricultural equipment, and at the time of the MBO, it was owned by the family of the company’s founder, Joseph Cyril Bamford.

In 2007, the management team at JCB approached the Bamford family with a proposal to purchase a controlling stake in the company. The MBO team included several key executives who had been with JCB for many years and had a deep understanding of the company’s operations and culture.

After several months of negotiations, the MBO team was able to reach a deal with the Bamford family to acquire a controlling stake in the company. The MBO was completed in December 2007, and the management team became the new owners of JCB.

The MBO was considered a success, as it allowed the management team to take control of the company and shape its future direction. It also allowed the Bamford family to exit the business while still maintaining a significant stake in the company.

Overall, the JCB MBO is a good example of how a management buyout can be successful when the MBO team has the necessary skills and expertise, and when the deal is carefully planned and executed.

Management buyout drawbacks

There are also potential drawbacks to a management buyout. One potential issue is the risk of overpayment, as the management team may be willing to pay a higher price than an external buyer in order to secure control of the company. This can put added pressure on the management team to perform well in order to generate sufficient returns to justify the purchase price. In addition, a MBO can be a complex and time-consuming process, requiring the management team to devote significant time and resources to the acquisition.

This is in addition to their current day job of being senior management of the current business and as such devoting significant time to the acquisition can easily negatively impact the day to day of the business. This usually is not the case in an acquisition as the buyer is external to the business and so the impact of the day to day and the senior management is much reduced.

One real-world example of a management buyout (MBO) that failed is the acquisition of the UK-based company MFI Furniture Group by its management team in 2007. MFI Furniture Group was a leading retailer of furniture and home goods, and at the time of the MBO, it was owned by the private equity firm Merchant Equity Partners.

In 2007, the management team at MFI Furniture Group approached Merchant Equity Partners with a proposal to purchase a controlling stake in the company through an MBO. After several months of negotiations, the MBO team was able to reach a deal with Merchant Equity Partners and became the new owners of the company.

Initially, the MBO seemed to be a success, as the new management team was able to grow the business and expand its operations. However, just five years later, in 2012, MFI Furniture Group faced significant financial challenges due to increased competition and declining sales. Despite efforts by the management team to turn the business around, MFI Furniture Group was unable to recover and was forced to enter into administration in 2012.

The MFI Furniture Group MBO is a good example of how a management buyout can fail within a relatively short period of time due to the inability of the new management team to effectively manage the business. The introduction of large amounts of debt adds significant pressure to day to day cash flow. It illustrates the importance of careful planning and execution in the MBO process and the need for the management team to have the necessary skills and resources to succeed.

How Do You Finance a Management Buyout

A management buyout may be financed through a variety of sources, including bank loans, private equity investment, or a combination of both. One type of MBO that involves the use of significant borrowing is known as a leveraged management buyout (LBO). In an LBO, the management team uses borrowed funds to acquire the business, with the intention of using the future cash flow of the company to repay the debt.

This type of MBO can be riskier for both the management team and the lender, as it relies on the company’s future performance to generate sufficient returns to cover the debt.

Management Buy-in (MBI)

A management buy-in (MBI) is similar to a MBO, but involves an external management team purchasing the business rather than the company’s existing management team. This type of acquisition can be an attractive option for businesses that are in need of new leadership or a fresh perspective. An example of an MBI might be a group of experienced managers who have worked in a similar or adjacent industry and have the skills and expertise to take over and grow a business and give it new life and new potential. Once the deal is complete, the MBI team becomes the new owners and takes over the management of the company.

There are several potential advantages to an MBI. For the current owners, it can be an opportunity to sell the business to a group of experienced professionals who are well-equipped to take it to the next level. For the MBI team, it can be an opportunity to acquire a business and have the opportunity to shape its future direction.

There are also potential risks and challenges associated with an MBI. For example, the MBI team may not fully understand the business or the industry or may not have the necessary resources or support to succeed. It’s important for both the current owners and the MBI team to carefully evaluate the potential risks and benefits before moving forward with an MBI.

A management buyout may be a good option for a variety of businesses and business owners. It can be particularly attractive for small to medium-sized companies with a stable management team and a clear growth strategy, but perhaps the current owner does not have the desire to pursue the next goal and take the business onto the next stage in its journey, perhaps they are wanting to retire.

For further information and impartial Management Buyout (MBO) Advisory Services, feel free to contact our founders at Dexterity Partners.