Management Buyout: What Is It and How Does It work

Do you have a desire to acquire a business you didn’t start?  There are several means to achieve this goal but one major way is through a management buyout (MBO).

MBO is a kind of leveraged buyout (LBO) yet distinct, in the sense that, in leverage buyout, you are required to stake the whole of the company’s assets as collateral if you must get debt financing.

Whereas in MBO, there is more financial liberty, as you would only have to stake a little of the company’s assets to manage its debt weight.

What is Management Buyout?

MBO is a kind of business acquisition where a team of knowledgeable employees, shareholders, or members of the management in a particular company decide to purchase the company.

The team combines their expertise to increase the profitability ratio of the company by taking more responsibility and control over the business.

MBO permits the management team to invest a little lower in the acquisition process compared to the profit they are going to make from the company in the future, all things being equal though.

The MBO strategy can be used to acquire both public and private sector companies. Though it is mostly used for the acquisition of small companies, permitting the initial owners to give way for innovation.

How to Go About MBO?

Before setting out to engage in an MBO, you would need to simulate the process both mentally and in writing, as this will help you gather all necessary facts on how to fully execute your plan. Here are a few major things you would need to look into amongst others;

Team management

Acquiring a private company might not need a team of management, as you might just retain the experts in the company and you might not also need a huge amount of funds for its acquisition.

But in the case of a public company, especially a large one, you might need to gather a team of professionals, as you would also need enough equity for acquisition which they might offer.

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Proposal Structuring

After gathering your team of management, you would need to draw up a well-detailed proposal, stating why you want to acquire the company, why you think you are more competent to increase its profitability and how you intend to go about it.

Finance Modelling

A proper finance model would be needed to achieve your goal. You would need to do a proper evaluation of the financial state of the company, how debt servicing and other financial matters of the company will be handled.

The model to be drawn and the analysis run ought to be well detailed.

Fund Sourcing

You would also need to come up with a means to source funds for the acquisition of the company just in case the funds raised were not enough.

Also, some funds will be needed to keep the company running, as ownership and management transition should not be felt by the customers.

Retention Planning

As you progress in your plan to acquire a company, you would also need to look into your retention strategy.

How do you intend to earn and maintain the loyalty of the workers, seeing that you were probably an employee or shareholder like them?  You might want to use the friendly yet principled employer strategy to relate with them.

Merits and Demerits of MBO

A management buyout has several benefits some of which are:

  1. Ownership and management transition is easy and quick since the new management has been part of the company ab initio.
  2. There would be no lag in the operational flow of the company since the new management is quite knowledgeable in matters that relate to the running of the company. Also, most of the workers functioning well in their offices are usually retained.
  3.  The cost of running a company after an MBO acquisition is usually not high when compared to other kinds of acquisitions and even startups.
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Amidst the several merits of MBO, it has some glitches, a major one is a difficulty that might be experienced if the company encounters a setback, either in debt servicing or any other major aspect of the company.

Especially if it is a financial setback in a public company or a large private company. Getting enough equity might not be so easy to come by, even Banks might not be willing to give loans due to creditworthiness.

How To Fund MBO

Funding an MBO is a crucial aspect of the whole process especially when the company is a large public company. Sourcing for its funding is a major task to be done by the management.

Some of the funding options used to finance MBOs in no special order are;

Private Equity

Private equity is such that involves buying of the company’s shares by a private equity company. The private equity company buys a portion of the company’s shares thereby pushing funds into the company.

This kind of funding is usually a bit risky, in the sense that most private equity companies are interested in short-term investments, so they push in their money through shares, and as soon as they get their target or sense any abnormality they leave.

This action might have a ripple effect on the operational flow of the company. Thus, you should be careful when deciding on the private equity company to work with, if you choose this funding option.

Mezzanine Financing

This kind of funding serves as a bridge for the debt and equity gathered by the management and the funds used in acquiring the company.

This also has its own risk, in that, if the company is experiencing any kind of glitch, and repayment is to be made they would be of utmost priority, meaning that they would be paid first attention before other matters, even bank loans.

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It also goes along with a condition of equity warranty, such that the investor can convert the debt of the company into the acquisition of shares in the company and so as the company grows they get more dividend thereby Increasing their stakes in the company.

Management Team Funds

The means of funding requires the management team to put their funds into the company. Some companies could agree with the team member to sacrifice their first-year salary, some might need to sell their assets in other companies, liquidate some of their investment, or mortgage their properties.

This action by the team members can relay a sense of obligation and commitment to external investors and lenders, motivating them to push in their funds into the company.

Seller’s Loan

Another means of funding is loaned from the seller. The seller can grant some amounts of loan to the new management stating the required time repayment would be made

Company’s Asset

Here the management can decide to stake their asset and mortgage of the  company as collateral to source funds from private lenders

Bank Loan

Bank loans are the most common means of funding. Here they get loans from banks to fund the company. Banks usually offer loans for a period spanning from 3 to 5 years, using the company’s assets as collateral.

MBO Success Indicators

As the transition process occurs, some of the following factors can stand as indicators for the success of the MBO

  • The extent of the commitment of the workforce
  • A defined structure that permits the free operational flow of the company
  • The attraction of investors towards the company
  • An accurate record of the company’s profit.


Management buyout has its benefits and limitations as stated above. As a prospective owner or potential seller, you should weigh the pros and cons carefully before making decisions and taking action.