What is a Management Buy Out or MBO?

Rythme nº 1 - Robert Delaunay

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Management Buy Out, also known as MBO, is referred to those kind of acquisitions where the company’s buyers is its management team (its sole director, all its directors or some of them). With this kind of acquisitions the management team use to require financing from third parties, this is, bank entities and, in especial, from venture capital entities. Notwithstanding the percentage of the price that is provided by third parties, the management team almost always has to participate with own funds (has to take part of the risk to prove its commitment).

In contrast to MBO, it also exists the Management Buy In or MBI, in which the acquirer is not the company’s management team together with third party funders, but a third party that replaces the pre-existing management team.

MBOs are viable transactions especially when the management team has better expectations for the company than the existing shareholders. In addition, MBOs have good reputation by venture capital investors, because them allow the companies to be revitalized by its current managers, who already know the business and also get involved as shareholders. Therefore interests are aligned.

The viability of MBOs depends, to a large extent, on the business plan proposed by the management team and accepted by the entities that provide the funds. Together with the business plan, applicable to all acquisitions of companies, with MBO the financial plan becomes even more relevant as it need to justify sufficient future resources to reimburse the funds and also a minimum expected return.

As can be seen, in MBO transactions we find three main subjects: (i) the owner or owners of the company, (ii) the management team that wishes to acquire the company and (iii) the external funder (bank entities and/or venture capital entities). Therefore, and without prejudice to other key subjects such as financial and legal advisors, the management team must negotiate on the one hand with the funders and, on the other hand, with the owners of the company.

When and how should begin the negotiations between the management team and the owners of the company is a sensitive issue, as it can break the confidence between them. Therefore, this kind of negotiations use to arise from informal conversations evolved over long periods of time, or from direct communications from the owners regarding their desire to transfer the company or part of it.