Increasingly, organizations are expanding through buying other companies. There are numerous benefits to acquisitions including economies of scale, reduction of redundant costs and various customer and product synergies. Businesses have adopted M&A growth as a form of organic growth and want to complete more deals. For these acquisitive companies, there is a significant amount of capital available to them in the middle market. This high level of capital availability has given rise specialized forms of acquisitions known as management buyout.
A management buyout, or MBO, is when a controlling interest in a company is purchased by management. Often in a management buyout, the purchasers do not have the necessary funds to complete the transaction without obtaining an outside loan or a promissory note from the owner. Most MBO’s are situations where the owner is seeking to exit and wants the business to continue in its current form with the existing management team. Owners usually have a high degree of comfort with their management team buying the company. With a private equity purchasers, an owner has very little assurance that the company will carry on in its current form. Management buyouts also allow the management team to take the company in a new direction. Often, long time owners value consistent cash distributions over investing in new growth for the business. This can frustrate a management team that sees promising new markets and opportunities. Through purchasing the company, the management team is assured that they can take the business in their preferred direction. Often this involves new innovation, business development and new product development.
Post-closing, a management buyout can result in some management organizational growing pains. There is a huge difference between managing versus owning a company. Owners focus on the long term, resource availability and having the right team. Management usually is focused on short term, tactical execution. Good pre- closing planning on the part of the new ownership team can ensure a smooth transition. Having a tactical blue print for the first 100 days post-closing is a good idea.
The best way to go about a management buyout is through financing the deal with non-dilutive capital. Private equity is expensive capital and end up as the owners as opposed to the management team. It is smart to seek out mezzanine and uintranche debt to supplement the management investment to facilitate the buy-out. With all of the capital available in the middle market and a large number of baby boomer fueled exits, management buyout are indeed on the rise and are likely to continue to increase in frequency.