Business acquisitions can take numerous forms, from open market trade sales to so-called “management buyouts” (MBOs).
Management buyouts are among the most popular and widely used formats, particularly from the perspective of smaller businesses that will often struggle to attract the attention of potential trade buyers.
But what exactly does the term ‘management buyout’ refer to, and how is this type of acquisition structured?
What is a Management Buyout and How is it Structured?
In general terms, a management buyout is a corporate finance transaction where the senior management and leadership teams within a company acquire the business from the existing ownership.
The structure of this deal is fairly simple, with the buying group often required to borrow money in their bid to complete the takeover.
An MBO transaction is considered to be a leveraged buyout (LBO), which means that the funds borrowed are secured against the core assets of the target business. So, the target of the acquisition is used as collateral, ensuring that enough funds can be raised to buy the company while maintaining a low rate of interest on the loan.
This particular iteration of a leveraged buyout may also be referred to as an LMBO, with the management and leadership teams required to borrow the requisite funds.
This type of buyout can be structured in other ways too. In some instances, for example, the vendor may agree to finance the buyout through a note, which is amortised over the course of the loan period.
The price charged at the time of the sale would usually be nominal, with the total being repaid out of company earnings over the following years.
The Benefits of a Management Buyout
As we’ve already said, an MBO enables vendors of smaller firms to sell their ventures quickly and efficiently, while optimising their real-time resale value.
This is an important advantage, particularly with MBOs typically occurring when the owner-founder is looking to retire or move on completely from their majority shareholding.
From the perspective of buyers, an MBO provides the perfect vehicle for the management team to utilise their expertise and realise their own vision for the growth of the business.
It can also be easier to secure finance through a leveraged MBO, and not only due to the provision of the business’s assets and operations as collateral for any future borrowings.
Lenders also like financing management buyouts as they’re usually quick and seamless transactions that ensure continuity of existing business operations. This is beneficial to both the company’s bottom line and the retention of customers, which can suffer when dealing with external buyers and trade sales.
