What is a Management Buyout (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 team believes 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 customers and clients of the business, as they can expect the quality of service to continue.
How to approach a Management Buyout?
If you’re part of the management team that wants to buyout the current owner(s), then 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 the purchase.
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 an 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, then you’ll likely be getting your financing from a single institution, but if it’s a larger transaction, then 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 independently of operating results.
Top 10 things to consider when planning a Management Buyout
Here are some of the most important points to consider when planning a MBO:
- Research the feasibility of the transaction
- Be open and transparent with executives and shareholders
- Cut key employees in on the deal (share the equity)
- Have a strong employee and customer retention plan
- Develop a thorough understanding of the value of the business (financial modeling and valuation)
- Get your financing all lined up
- Don’t get hostile, remain friendly
- Design a well thought out shareholders agreement
- Keep the buyout low key until the deal is signed
- Don’t neglect the operations of the business while working on the deal
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