In the process of business sale process there is an option to consider the exit of the owner or the entrance of the one who buy the company call Management Buy Out (MBO). Below we explain what a Management Buy Out is, its main advantages, stages and operations. We also talk about a basic term in the investment ecosystem that you need to know.
A management buy-out is a management buy-out of a business by its own management team, which usually requires external financial backing by, for example, private equity funds.
MBO operations are usually carried out on companies that are in good financial health, in mature sectors and that are cash generativeThese are usually buy-out operations that private equity can leverage with bank debt.
This type of operation usually takes place in family businesses, where the owners do not have a clear succession within the family and whose managers are a good option to take over ownership together with a private equity fund. They are also common in spin-offs or business units that are no longer strategic for a multinational. In this case, the management team of the unit put up for sale can seek the support of a private equity fund to launch a Management Buy Out and buy the business unit or company.
One of the fundamental aspects in this type of transaction is that there are three parties that play a relevant role in the negotiation: the management team, the divesting shareholder and the financial partner.
The main situations in which such an operation is carried out are as follows:
Compared to other types of operations in the sale or purchase of a company, those of Management Buy Out are:
This makes the MBO one of the most desirable transactions for private equity. In fact, many buy-out transactions include contracts or clauses that commit the management team to stay in the business.
The process for carrying out a MBO is made up, broadly speaking, of the following stages:
For a Management Buy Out to be successful, a number of factors must come together.
The existence of a highly professional and competent management team is a determining factor. It is important to assess whether the managers are capable of operating as owners of the business and can lead the company towards new growth.
From the point of view of profitability and financial aspects, not just any company is suitable for this type of process. There must be a "predictable" capacity to generate resources, i.e. a positive cash flow, in order to be able to meet the various forms of financing.
It is important for the external investor to have the opportunity for an attractive exit at a certain point in time, which must be agreed before the transaction is closed. The investor then generates the main return on his investment by acquiring all or part of his stake from another investor, the stock market or the management team.
Another very similar operation is Management Buy In (MBI).