A MBO, or management buyout, is when the purchaser does not have the availability of funding to acquire a company without resorting to some sort of loan. A management buyout is a particular method for acquiring a company where the managers of a company choose to purchase a substantial share or all of a business from its private owners.
Management buyouts make changes in ownership easy. For starters, when a management buyout occurs, there is a much smoother transition of powers. Since management works in the business, there are few transition issues which reduces risk, and makes the ownership change transparent to clients and business partners. The familiar faces that were there under the old ownership would still be apart of the team. The smooth transition also allows for the internal processes to be handled quickly and clearly as well. Any new responsibilities that previously were handled by the owners can be dispersed across the management group. Usually, there is a well-defined core group of manager- owners who assume these responsibilities. In MBO’s, often management has been stifled under prior ownership and have a new growth plan. The change in ownership allows them to unleash their new growth plan and increase long term value of the business.
First, the “buyers” and “sellers” must agree on a price. Then, there is a valuation of the company to confirm the agreed-upon price. Next, managers assess the portion of the company it can purchase immediately and then how much will need to go onto a loan or a promissory note. A loan or promissory note is created and a transition plan is developed to make the transaction efficient and effective. Finally, once the finalized deal is in place, the powers are transferred and the management team takes complete control of the company.
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