Management Buyout (MBO)
An acquisition involving the existing management or group of employees is the characteristic feature of a management buyout. It can be defined as the purchase of all or part of a company from its owners or parent company by a section of its own company’s management. This buy-out process is similar to a normal buy-out from a legal perspective. Buy-outs are preferred by companies or owners looking at exiting from the current business portfolio or when the owners are retiring. Read on as this article brings to light the fundamentals of a management buy-out.
Advantages of a Management Buyout
- For the existing group of managers involved in the buy-out, this new standalone entity offers higher financial rewards than they would have received as employees.
- For the company that is the seller, the future of their sold out section now has a devoted management team that is responsible for the new firm’s future course of success thereby reducing their risk of failure.
- Since the buy-out team has a sound understanding of the business, there is not much to be done on the information sharing end.
Check Points for a Successful MBO
- A united complete and strong MBO team is the core of this transaction and the new standalone company in the making.
- Feasibility of the buyout against the debt and investors shares is critical. This is done taking the past financial performance, present corporate framework and the future plan of growth into consideration. Expert opinion is beneficial to make a sound choice and productive action plan.
- Diligence with documentation holds the key to avoiding getting into legal hassles. This includes all proofs of agreements with the vendors and the investors.
- Firstly, the buying team and the selling company reach a common ground of understanding in terms of the price and to be acquired a section of the business.
- Evaluation of the business is the primary step in this process. A united go ahead from the management buy-out team depending on this evaluation forms the much-needed preparation for the deal.
- The MBO team now drafts the shareholder agreement based on the above two phases.
- Now it is time to put forward the business plan and all the related documents including the investment proposal to the financial institutions or the investors.
- This next stage involves two critical negotiations; firstly, confirmation of the final deal with the vendor and secondly, negotiations with one or more investors. Negotiations with the investors are critical as they would like to acquire different sections of the business keeping the final proposition in view. This calls for specialist advice and caution while choosing your investors.
- Transition plan is designed which includes the future course of action and tax structuring.
- Deal is sealed, transaction completed, and ownership transferred.
- Paying out the financers is the final phase that is done in a manner and timeframe that avoids slowing down the growth of the newly found company.