Management Buyout (MBO)

This article outlines what an MBO is, why leverage is employed, and what steps are involved in the transaction.

What is a MBO?

A management buyout (MBO) is a corporate finance transaction where the management team of an operating company acquires the business by borrowing money to buy out the current owner(s).  This transaction is a type of leveraged buyout (LBO) and can sometimes be referred to as a leveraged management buyout (LMBO).

In a MBO transaction the management teams believe they can use their expertise to grow the business, improve its operations, and generate a return on their investment.  These transactions typically occur when the owner-founder is looking to retire or a majority shareholder wants out.

Lenders often like financing management buyouts because they ensure continuity of the business’ operations and executive management team. This transition often sits well with customer and clients of the business as they can expect the quality of service to continue.

 

How to approach a MBO?

If you’re part of the management team that wants to buyout the current owner(s) you’ll have to be thoughtful in your approach (or you may be approached by the owner).

Put together a thoughtful proposal outlining why you want to buy the business, what you think it’s worth, and how you would finance it.

Be sure to do your due diligence including building a financial model and performing a thorough valuation analysis.

It’s important to know which members of management will participate in the buyout, and which members will not.  From there you will have to choose a fair way of distributing equity in the transaction.

 

How to finance a MBO (or LMBO)?

As mentioned above, you’ll need a business plan and a business forecast, financial model and valuation.

If it’s a smaller transaction you’ll likely getting your financing from a single institution, but if it’s a larger transaction you’ll likely have to syndicate the deal across a group of institutions.

Consider using a vendor take-back note to help fund the transaction.  This can have milestones attached to it, in the case of an earn out, or can be paid independent of operating results.

 

Additional information

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