The MBO Method

Management Buy-out

Summary of the MBO Method. Abstract

Purchase of a business by its own management

Essentially, a management buy-out (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 an equity interest in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners normally sell most or usually all of their investment 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.

Typical reasons for the purchase of a business by its existing management include:

Certain parts of an organization are no longer seen as a core competence / no core activity by its parent company
A company is in financial distress and 'needs the cash'
Parts of acquisitions that are not wanted
In case of a family business: succession issues through retirement of the owner
The management team stand 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?

Speed – An MBO can be much quicker than a trade sale.
Strategic considerations – For example the selling party may not wish competitors to acquire control.
Confidentiality – The selling party may not wish to let competitors have access to sensitive information that would be disclosed during a trade sale process.
Familiarity - With an MBO the selling party can continue to deal with a management team with whom it has an established relationship.
Pricing

Feasibility of a Management Buy-out? Typical criteria are:

Sound and well-balanced management team,
Business must be commercially viable as a stand alone entity,
Willing vendor,
Realistic price (Valuation... Discounted Cash Flows, Net Asset valuation, Price Earnings ratios),
Buy-out must be capable of supporting an appropriate funding structure.

The typical steps in an MBO 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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Compare with Management buy-out: Leveraged Buy-out | Acquisition Integration Approaches | Core Competence | Outsourcing

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