Management Buyout – MBO

Understand

A management buyout (MBO)  is a transaction in which a company’s management becomes the owner of the company, generally in association with a financial institute.

Example

For example, AB Limited is a publicly traded company with 20% shares of management and else 80% are traded in stock exchange. In management buyout (MBO), company’s management will buyout 51% shares ended up with a controlling interest in the company, generally by financing through financial institutions and venture capitalists.

Explanation

In an MBO, the purchaser of a company is not another company, but the existing management. Usually, it is financed with some capital from management and major from financial capitalists and financial institutions. The investors and financiers provide cash by considering an exit strategy because they prefer to realize the profit in the medium term. For a successful management buyout (MBO) following questions should be answered:

  • Do the current owners want to sell because resistance from them usually ended up unsuccessful buyout?
  • Does business has potential to grow because management will switch from relatively safer salaries to the more risky business ownership position?
  • Does management has sufficient competencies, knowledge, and willingness to take risks in their respective fields?
  • What price should be paid as it is crucial in determining the long-term success of the acquisition?

Importance

A management buyout (MBO) is considered a better option for the future growth of the company because management has clear idea about the future prospect and better understanding of the processes of the company.

Next: How should your Management Buyout (MBO) be funded?

 

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