Loading the player...

What is a 'Management Buyout - MBO'

A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout (MBO) is appealing to professional managers because of the greater potential rewards from being owners of the business rather than employees. MBOs are favored exit strategies for large corporations who wish to pursue the sale of divisions that are not part of their core business, or by private businesses where the owners wish to retire. The financing required for an MBO is often quite substantial, and is usually a combination of debt and equity that is derived from the buyers, financiers and sometimes the seller.

BREAKING DOWN 'Management Buyout - MBO'

In a management buyout (MBO), a management team pools resources to acquire all or part of a business they manage. Funding usually comes from a mix of personal resources, private equity financiers, and seller financing. An MBO is different from a management buy-in (MBI), in which an external management team acquires a company and replaces the existing management team. It also differs from a leveraged management buyout (LMBO), where the buyers use the company assets as collateral to obtain debt financing. The advantage of an MBO over an LMBO is that the company’s debt load may be lower, giving it more financial flexibility.

An MBO’s advantage over an MBI is that as the existing managers are acquiring the business, they have a much better understanding of it and there is no learning curve involved, which would be the case if it were being run by a new set of managers. Management buyouts are conducted by management teams that want to get the financial reward for the future development of the company more directly than they would do as employees only.

However, there are several drawbacks to the MBO structure as well. While the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial. Not all managers may be successful in making this transition.

Also, the seller may not realize the best price for the asset sale in an MBO. If the existing management team is a serious bidder for the assets or operations being divested, the managers have a potential conflict of interest. That is, they could downplay or deliberately sabotage the future prospects of the assets that are for sale to buy them at a relatively low price.

MBOs are viewed as good investment opportunities by hedge funds and large financiers, who usually encourage the company to go private so that it can streamline operations and improve profitability away from the public eye, and then take it public at a much higher valuation down the road. In the case the management buyout is supported by a private equity fund, the private equity will, given that there is a dedicated management team in place, likely pay an attractive price for the asset. While private equity funds may also participate in MBOs, their preference may be for MBIs, where the companies are run by managers they know rather than the incumbent management team.

RELATED TERMS
  1. Management By Objectives - MBO

    Management by objectives is a management technique for setting ...
  2. SEC Schedule 13E-3

    SEC Schedule 13-E-3 is a schedule that a publicly traded company ...
  3. Funds Management

    Funds management is the management of a financial institution's ...
  4. Manager of Managers - MoM

    A manager of managers (MoM) approach is a type of oversight investment ...
  5. Management Audit

    A management audit is an analysis and assessment of competencies ...
  6. Reverse Leveraged Buyout

    A reverse leveraged buyout occurs when a business that went private ...
Related Articles
  1. Small Business

    Why Successful Businesses Get Acquired

    There are many motives that drive companies into the arms of an acquirer, learn the reasons why owners sell out.
  2. Financial Advisor

    5 Benefits of Investing With One Asset Manager

    Learn why one asset manager may be better for your portfolio’s rate of return and underlying costs as opposed to many managers.
  3. Investing

    What ETF Fund Managers Do

    Find out about the typical day in the life of an ETF portfolio manager, and learn about the primary job responsibilities of this career.
  4. Personal Finance

    Who Do You Need on Your Financial Team?

    To increase your chance of financial success, have a team of professionals in place that you can trust.
  5. Investing

    Understanding Leveraged Buyouts

    LBOs are often presented as predatory by the media, but it really depends on which side of the deal you're on.
  6. Insights

    Sports CEOs: For Better Or For Worse

    The owner of a sports team may be the single most important person in determining the team's success.
  7. Investing

    Do Your Research When Using an Active Manager

    When it comes to using active managers for your portfolio, it pays to do your research.
  8. Tech

    10 Most Famous Leveraged Buyouts

    Learn about the boldest, riskiest leveraged buyouts in history and how they either become famous for failing miserably or making billions.
  9. Investing

    Pioneer Natural Trades Ex-Dividend Wednesday

    Pioneer Natural Resources will send its dividend payment on April 12 to shareholders of record as of March 31.
  10. Personal Finance

    Using a Financial Team With a Leader

    Having a financial team with a leader provides a coordinated approach to reaching financial goals.
RELATED FAQS
  1. Passive vs Active Portfolio Management

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  2. Why Isn't My Stock Trading at the Buyout Price?

    An acquisition or merger does not necessarily mean the deal will be resolved as originally stated. Read Answer >>
  3. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
Trading Center