What Is a Management and Employee Buyout (MEBO)?

A management and employee buyout (MEBO) is a corporate restructuring initiative that involves both managerial (MBO) and non-managerial employees (EBO) buying out a firm in order to concentrate ownership into a small group from a widely dispersed group of shareholders.

Key Takeaways

  • A management and employee buyout (MEBO) occurs when both management and select employees join together to take over an existing firm.
  • MEBOs may be used to take a public company private or as an exit strategy for a newer venture.
  • Because management and employees often have competing interests or preferences, MEBOs may be difficult to arrange and complex to structure.

Understanding Management and Employee Buyouts

MEBOs are generally used to privatize a publicly traded company, but can also be used as an exit strategy for venture capitalists or other shareholders in an already private firm. MEBOs are often seen as a way to bring greater efficiency to a firm's production because they can provide added job security for employees—motivating them to give a stronger effort to improve company profitability.

MEBOs may be used by 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. An internal team of management and employees will pool their resources to acquire a business they operate or manage. Funding often comes from a mix of personal savings and capital, seller financing, or private equity financing.

This type of buyout is conducted by management and employee teams that want to more directly benefit from the growth and future direction of the company than they can do as employees only.

Although the potential to reap the rewards of ownership is significant, employees and managers must make the transition from being employees to owners, which requires more of an entrepreneurial mindset. At the same time, management and workers may have differing interests or incentives, making a MEBO less common than either an MBO or EBO. As a result, MEBOs may not always be a smooth transition or may fall apart before completion.

MBO vs. EBO

A MEBO is essentially a management buyout (MBO) combined with an employee buyout (EBO). A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage. While management gets to reap the rewards of ownership following an MBO, they have to make the transition from being employees to owners, which comes with significantly more responsibility and a greater potential for loss.

An employee buyout (EBO) is a restructuring strategy in which employees buy a majority stake in their own firm. This type of restructuring is a company takeover by its workers. For small businesses, an employee buyout often focuses on the sale of the company's assets, while for larger firms, the buyout might be for a subsidiary or division of the company. In either example, buyouts are most often used when companies are in financial distress.