What Is a Management Buy-In (MBI)?

A management buy-in (MBI) is a corporate action in which an outside manager or management team purchases a controlling ownership stake in an outside company and replaces its existing management team. This type of action can occur when a company appears to be undervalued, poorly managed, or requires succession.

Key Takeaways:

  • A management buy-in (MBI) occurs when an outside manager or management team purchases a controlling ownership stake in an outside company and replaces its existing management team.
  • A company that experiences an MBI is often undervalued and experiencing difficulties in some area.
  • The buyer must be careful to accurately value the target so that they do not pay more than is necessary.

Understanding Management Buy-In (MBI)

Management buy-in is also used in a non-financial sense to refer to situations where the support of management is sought for an idea or project. When management "buys in," they have thrown their support behind an idea, which would typically indicate financial resources will be allocated so that the venture can move forward.

A management buy-in differs from a management buyout (MBO). With an MBO, the target company's existing management purchases the company. MBOs typically require financial resources beyond those of management, such as a bank debt or bonds. If a significant amount of debt financing is required, the deal is described as a leveraged buyout (LBO).

Management buy-in (MBI) is a corporate activity. In management buy-in, a company is purchased by a manager or a management team from outside the company. The target company is acquired by outside investors when the company's decision-makers consider it to be underperforming, and the company’s products could generate greater than current yields with the proposed change in current business strategy and/or management. After the acquisition, the buyer can replace the current board of directors of the company with their representatives. In many cases, there is competition among buyers to purchase a suitable business. Generally, these management teams are led by experienced managers at the managing director level. The difference between management buy-in and management buy-out is the position of the buyer. In the case of a management buy-in, the buyers are external to the target company. In the case of a management buy-out, the buyers working for the target company.

Management buy-in is an acquisition tactic that follows a process.

Company Analysis

First, the buyer conducts a market analysis on the target to gather data on its buyers, sellers, competitors, suppliers, substitutes, products and services, customers, the scope of business and the financials. The buyer must also know what other companies are looking to buy the target because this will affect the price.

The Negotiations

Based on the analysis, the buyer prepares an offer for the target company’s owners. Both parties will negotiate the price and may reach an agreement.

The Transaction

If agreement on the price and terms are reached, the transaction will ocur based on the local rules and regulations. Once the transaction is complete, the buyer officially becomes the owner of the company’s management and can nominate their representatives as the board of directors.

Possible Advantages of Management Buy-Ins (MBIs)

In many cases, companies that undego an MBI are undervalued, and the buyer can sell the company at a higher price in the future. Also, if the current owners of a company are unable to manage the company, an MBI is a win-win situation for both the buyer and the seller. A new management team might have better knowledge, contacts, and experience, which can often stimulate growth in a company maximizing the shareholders' wealth. Lastly, current employees may become motivated because of management changes.

Possible Disadvantages of MBIs

There is always the possibility that an MBI will not have the desired affect and the new management team may fail to bring the required growth to the company. Existing employees may feel demotivated by the changes. Also, the buyer may end up paying way more than required if they estimate the value of the company incorrectly.