Management Buyout Definition
A management buyout (MBO) is a type of acquisition where the management of the company acquires the ownership of the business by increasing their equity stake or by purchasing assets and liabilities with the objective of leveraging their expertise to grow the company and drive it forward using own resources.
Methods to Achieve Management Buyout
#1 – Asset Purchase
Asset Purchase means to purchase the company by purchasing the assets and liabilities of other companies.
Salient Features of Asset Acquisition are as given below:
- Suitable for SMEs
- Allows selection or rejection of assets and liabilities
- Helps in price allocation and stepped asset values
#2 – Stock Purchase
In Stock Purchase Acquisition, the buyer will directly buy shares of the target company and will acquire their interest ownership and control in that company.
Examples of Management Buyout (MBO)
Company XYZ is a listed company where the promotor owns 60 % of the company’s stock, and the remaining 40% is stock traded in public.
Company planned management buyout, as per the plan, management of XYZ Ltd will undertake arrangement to acquire appropriate shares from the public so that they possess a controlling interestControlling InterestA controlling interest is the shareholder's power to speak in the corporate actions or decisions derived from possessing a considerable chunk of the company's voting stock. However, such a stakeholder may or may not hold a significant portion of the company's common stocks. of around 51% of the company’s total shares.
To finance this arrangement, the management may look to a bank, financial capitalist or VCs to help them in funding and set up the acquisition of the target company.
The V Group is rigorous in the buyoutsThe BuyoutsA buyout is a process of acquiring a controlling interest in a company, either via out-and-out purchase or through the purchase of controlling equity interest. The underlying principle is that the acquirer believes that the target company’s assets are undervalued. of the peer company for expansion and market penetrationMarket PenetrationMarket penetration is calculated as how much the product or service is being used compared to its total market and how it creates a position in the market, especially in the primary stages of setting up the business.. CEO of the company announced that USA Geo business would be sold off as part of a management buyout, and after that, the same will be known as, Z limited.
Another part of the group, India Geo went a management buyout and changed its name to Q limited. In the UK Geo group also underwent a similar process and renamed the same as ABC Limited.
- Simple and easy to understand: Management buyouts are very simple and easy to understand even to laymen.
- Confidentiality can be maintained: One of the important aspects of Management buyout is that all the details can be confidential as no external person will be involved in the acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. process
- High chance of success: Management buyouts are getting drafted highly in a structured manner. Hence the chances of success are very high.
- Adequate for small business persons: Management buyouts are very much suitable for entities with smaller volume operations and fewer complexities.
- Speedier than other options: Normal time taken for the completion of Management time out is from 15 days to maximum a month. This helps in clearing all the formalities sooner.
- Easy to negotiate: Management buyout doesn’t involve many complexities in negotiation. Hence, it is straightforward to undertake the negotiation of the same.
- Difficulty in raising funding: As Management buyouts involve internal persons only, the external world or financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. feels stressed while issuing the funding. Hence, it isn’t easy to raise the funding under this option
- Lack of business ownership success: In management buy out, existing management will take over the entity. Hence there are chances that new technology or new idea may be neglected. As a result, business entrepreneurship may be missing.
- Insider trading risk: As all the parties in management buyouts are internal ones, there are great chances that any management executives can do insider trading based on the available critical information.
- No synergy savings: There are chances that management can be much immature in acquiring the business. Due to this, there can be no synergy savings. This could reduce the stock prices as well.
Modes of Funding of MBO
- Management contribution
- Asset financeAsset FinanceAsset financing is defined as a loan taken out by an organization using balance sheet assets as collateral, such as land and buildings, vehicles, machinery, trade receivables, and short-term investments. The asset's value is divided into regular payment intervals of the asset's unpaid portion plus interest.
- Bank debt
- Private Equity
- Vendor support
Setting Up Management Buyout Process
- Research: It is of utmost important to do initial R&D before going for any buyout options.
- Set up a transparent discussion: It is much necessary to have a transparent and open discussion with stakeholders and other parties to disclose the objectives and expectations behind the acquisition.
- Have a proper plan for the retention of employees: Try to determine the plan for the status of employee post-acquisition while going into a negotiation. Hence the confidence of the employees will be maintained in management.
- Understand the business: Undertook a thorough understanding of the business in which one is interested in buying out the operations.
- Evaluate the future of the business: Evaluate the plans of business and the way it will be carried out post-acquisition.
- Create a proper financial plan of funding the same: Do proper paperwork of how the acquisition will be undertaken, which will help present to the fund providers and shareholders.
- Obtain proper consensus of shareholders: Obtain through approvals from shareholders and take them in confidence to proceed with the acquisition process.
- Keep all the details confidential, until proper project plan is getting signed: Ensure all the needed details are kept confidential until the public announcement, else there are chances of misuse of these details.
- Maintain focus on all the factors that are affecting the purchase and ensure proper running up of the business: Ensure all the factors that may have an impact on the running of the business and in the acquisition process are considered while evaluating this plan.
This has been a guide to Management Buyout and its definition. Here we discuss methods of MBO along with examples, process and financing. You can learn more from the following articles –