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What is an MBO?

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What is a Management Buy Out?

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.

What is an MBO?

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.

When is an MBO carried out?

The main situations in which such an operation is carried out are as follows:

  • Privatisation of public companies: this is an interesting alternative to share issues (usually the case in the UK).
  • Defence against a possible acquisition of the company by a third party
  • When the majority shareholder wishes to sell its shareholding
  • Family businesses whose owners do not have a clear succession within the own family
  • Sales of multinational business units
  • As a last resort for companies facing closure (this is very rare).

Advantages of MBO

Compared to other types of operations in the sale or purchase of a company, those of Management Buy Out are:

  • Involvement of the management team not only as professionals but also as owners.
  • Maintaining the independence of the business project.
  • It includes a fully committed team, with their savings invested in the company and a clear understanding of the requirements of the sector.
  • With regard to customers or suppliers, there are no changes in the company.

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.

Stages of the process

The process for carrying out a MBO is made up, broadly speaking, of the following stages:

  1. Feasibility analysis: development of the business plan, determination of the financial structure and search for capital.
  2. Negotiation with the seller: determination of the agreement (price, payment conditions, etc.) and preparation of the necessary legal documents.
  3. Final phase: regulation and articulation of the agreements reached. The new managers implement the ideas integrated in the business plan.

Important factors to take into account in the operation

For a Management Buy Out to be successful, a number of factors must come together.

  • That the company's shareholder decides to sell its shareholding
  • Existence of a professional management team
  • Solid business with tangible growth potential
  • Attractive exit opportunity for the external investor

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).