A management buyout (MBO) is a form of acquisition where a company's existing manager or managers acquire a large part or all of the company For instance, if you are the managing director of a large division of your
company and reckon you have been doing a pretty good job of running it but suspect that your division may not figure highly in the long term vision or plan of the board then you could attempt a management buy out.
Management buy outs as a means of achieving business succession, have been in use for some time. Despite the level of sophistication that has evolved for this type of transaction, for those contemplating the move from manager to owner/manager, the process can still be daunting.
Management buyouts are similar in all major legal aspects to any other acquisition of a company; however the
particular nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that follow from that.
However, Richard Hall, transaction advisory services partner at Ernst & Young says that the first thing
you need to establish is whether you have a willing seller. He warned that if it is not clear how the owner feels, you need to tread very carefully. History is littered with occasions where the management has said it would like to buy out its division but the parent company has said no ” and then shortly after-wards the management has left. It is a delicate play,"? he said.
On the upside is the fact that as the incumbent management of the business you are in a strong position to put yourself forward as a potential buyer. Hall added: "From the parent company's perspective, your advantages as the management team are confidentiality, continuity and speed"?
Confidentiality is important because if you open up a sale process, it is just like selling a house” people come and have a look to find out about it even if they don't want to buy it. Continuity is important in some companies where the
founders have built up things over time. And because you are in situ already, there is the advantage of speed because the parent company will not have to go through a prolonged auction process."?
In many cases the company will already be a private company, but if it is public then the management will have to take it private.
Objectives of an MBO
1 The reason for an MBO from the managers' point of view may be to save their
jobs, either if the business has been scheduled for closure or if an outside
purchaser would bring in its own management team.
2 They may also want to maximize the financial benefits they receive from the
success they bring to the company by taking the profits for themselves. This is
often a way to ward off aggressive buyers.
According to figures from the Centre for Management Buy-Out Research at Nottingham University
314 MBOs were completed in the UK
in the first half of 2004 - the equivalent of 12 a week - at a total value of
However, the question is, exactly how do MBOs take place, and what are the
potential pitfalls both during the process and after one has been successful?
How Do You Fund An MBO Plan?
Financing a Management Buyout plan might not be an easy task, but having identified an opportunity
and a willingness of the owners to sell, the MBO team will need to prepare a
business plan. This usually takes place in conjunction with a Chartered
Accountant with a strong background in corporate finance.
It must however be noted that there are several ways available to finance an
MBO, here are some of the possible options:
1. Debt Financing
2. Private Equity Financing
3. Vendor Financing
4; What other options exist?
Sometimes the target company itself will have assets which can be used to
assist in funding the deal, i.e. monies lent to the purchaser or security over
assets given to a funder by the target company in support of the obligations of
the purchaser. In a share purchase the ability of the target company to do this
will depend on the financial health of the target company. This is because it
will constitute "financial assistance" which is only lawful with an
appropriate accountant's report and declarations from directors to the effect
that the company can meet its debts as they fall due over the next twelve
months. This issue does not arise in relation to an asset sale.
5. Share purchase or asset purchase “ which is best?
In a share purchase the new management inherits all the assets and liabilities of the target
company. In an asset purchase they can get to "cherry pick". Greater due diligence is
required for a share purchase. The level of warranty cover to be given by the
owners of the shares will invariably be restricted to reflect the prior
knowledge and involvement of the management team in the business. Sometimes the
structure of the deal has to be modified to fit the funding package or the
aspirations of the vendors to whom an asset sale may not be as attractive as a
With an asset sale the owners will have the problem of extracting the sale
proceeds from the vendor company. As a result they are unlikely to have as
favourable tax treatment in this structure as they would on a share sale “
particularly when they have owned their shares for more than two years.
Examples of MBOs
1 Springfield Re-manufacturing Corporation,
a former plant in Springfield, Missouri
owned by Navistar
was purchased by its managers to save the company from closure.
2 In the UK, New Look was the subject of a management buyout in 2004 by Tom Singh, the
founder of the company who had floated it in 1998. He was backed by private
equity houses Apax and Permira, who now own 60% of the company.
3 The UK arm of Virgin Megastores was sold off as part of a Management buyout, and
4 ClarityBlue is another firm that was founded by an MBO, a hi-tech company,
its software systems allow a number of blue chip firms - from Lloyds TSB to Vodafone - to monitor and
develop their interactions with their customers.
Before its successful MBO in 1993, it was part of a US
company, but today it is wholly UK
"Basically it got to the stage where we outgrew our American parent
company," says ClarityBlue chief executive Duncan Painter.
"We were by then representing 80% of the business, and it became obvious
that it was no longer sensible for them to keep control of us. We needed a lot
more investment than was possible to continue to grow and develop."