Planning a successful MBO?

An MBO or MBI can give you the opportunity to step up from senior manager to business owner. How do you plan a successful MBO?

What is an MBO and why might a business go for a MBO

When a business is purchased by the management team within the company by borrowing funds, this is referred to as a Management-Buy-out (MBO). Generally, MBOs are only partially financed with private assets by the management. Most of the money used to buy out the current owners is provided by banks and financial investors.

A business might decide in favour of a MBO for various reasons. One might be that the current owners of the business decide to retire or withdraw from the company. It can also be a move to release divisions in large-scale companies that are no longer considered significant to the overall brand.

For management teams it can mean greater financial rewards and more influence in the decisions that the company makes.

In general, business owners often welcome MBOs, since they can be confident that management is extremely committed to the success of the brand.

Management Buyout (MBO) vs. Management Buy-In (MBI)

The terms Management Buyout (MBO) and Management Buy-In (MBI) can seem confusing since they sound similar. However, they are very different. Instead of management buying the company, during an MBI a company is bought by external managers and the existing management team of the company is replaced.

How is an MBO funded?

Since the management team is usually not able to purchase the company themselves, the money for the sale needs to be raised. Substantial funding is required for management buyouts. For this reason, management looking to buy the firm will connect with investors, banks, private equity firms, and possibly mezzanine lenders. This means that outside entities gain some financial control over the company.

How is an MBO undertaken?

A MBO is a long process, which typically takes many years to complete. For a successful MBO it is important that the management team has enough experience and is regarded as trustworthy by the owner of the company.
A management team within a company usually has a deep understanding of the brand that they are looking to purchase. This makes an MBO a good option for a buyout in many cases and gives managers the chance to purchase all or part of a company and gain more influence within that firm. While funding typically has to come from investors, which may give external entities some control over the company, management will still be able to invest in a brand that they are already committed to and very familiar with.