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Management Buyouts: What Are They and Why Invest in One?

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A management buyout offers unique opportunities as a way to take a company private — and major returns for investors, too. Learn more below.

A management buyout, or MBO, is a way to transfer ownership of a business. As the name suggests, a management buyout occurs when members of a management team (often the existing, incumbent one) buy the company from its owners. It’s a complex transaction which may provide significant rewards if handled properly.

Virgin Wines’ MBO is a good example of this. The management team of Virgin Wines sought funding from investors, including Connection Capital clients, to complete a management buyout in November 2013. A little over seven years later (in 2021) following successful growth — which culminated in the company’s initial public offering (IPO) — our clients exited with the investment generating a 7.7x gross return.

In this article, we’ll explain everything you need to know about management buyouts, including what they are and how they work. We’ll also look at some of the benefits they can provide — not least to private equity (PE) investors, who can potentially generate high returns from investing in these types of deals and supporting the management team to improve the value of the company.

What is a Management Buyout?

A management buyout can be defined as a financial transaction in which someone, or a group of people, often from the incumbent management team, purchases the business from the original owner.

The buyer can be an individual manager or part or the whole of the management team, and the business can be purchased in whole or in part. However, as this is a buyout, the purchaser must acquire at least a controlling interest in the business, if not the entire entity.

A management buyout may occur for a number of reasons, including:

  • To give management more control over a company and its resources
  • To allow the old ownership to exit the business, but ensure it remains in the hands of people who are connected to it
  • To let managers who already know their business lead and direct it themselves
  • To attempt to rescue a company in distress
  • To allow managers access to the financial benefits they can reap as owners rather than as employees, and to net investors a potential high return

Difference between Leveraged Buyouts (LBOs) and Management Buyouts

In most cases, a management buyout is also a leveraged buyout (LBO). A leveraged buyout is simply a buyout funded to a significant degree by borrowed money. More specifically, an LBO sees the buyer borrow against the assets of the business.

It is possible for a management team to accomplish a buyout without seeking leverage funding, but it is very rare. The two concepts are distinct, however, and refer to different aspects of the buyout. An LBO is defined by the mode of its funding, while a management buyout is defined by who performs the acquisition.

Because of this, it is not unusual to see references to see leveraged management buyouts, or LMBOs.

What is a Management Buy-In (MBI) and a Buy-In Management Buyout (BIMBO)?

As the name suggests, a management buy-in (MBI) is the opposite of a management buyout. In simple terms, where a management buyout occurs when a company’s internal management acquires all or part of the business, a management buy-in involves an external management team acquiring the business. The new managers will then usually replace the old, though they may instead reshuffle and restructure.

MBI groups are often referred to as ‘turnaround teams’ because they aim to ‘turn around’ a business they believe is being failed by its management.

In a buy-in management buyout (BIMBO), by contrast, the internal management joins an external team of managers to buy the company from the owners together.

In this way, it’s a mixed transaction, with elements of both an MBO and an MBI, as the existing management team buyout at the same time as the new managers buy in.

How Does a Management Buyout Work?

A management buyout may be a major, complex transaction. A lot of cash and assets can be at stake and, in some cases, the process can take a long time to complete. There are also a lot of people that may need to be involved in addition to funders, including analysts, accountants and lawyers.

It’s important, then, to have a notion of what needs to happen to execute a successful MBO.

1) Research and preparation

Once the owners of a company want to sell all or part of their business, and members of the existing management team want to buy, both sides can begin researching and preparing to undertake an MBO.

The first step here involves a lot of scoping: discussions and decisions, including with professional advisors.

All of this should feed into the next step: crafting a formal proposal.

This typically includes things like:

  • Which members of the management team are intending to make the purchase
  • The reasons for the buyout
  • A sale price agreed upon by both buyers and sellers — in some cases, this might require an independent expert to conduct a valuation
  • Any other terms of the deal
  • How the buyout will be financed

In addition, the prospective new owners should craft a plan for what they will do with the business after the sale has been completed. This is sometimes included in the proposal for the MBO, and is a crucial part of the next step in the process: securing financing.

2) Financing

Once the basics have been agreed upon and a plan has been put in place, it’s time to turn to financing. An MBO can be financed through cash, debt, equity investment, or any combination of different types of financing.

Debt funding for a management buyout can be provided in two ways: through traditional bank lending, or by borrowing from specialist funders against the company’s assets, like in an LBO. Banks often consider buyouts risky and so may be unwilling to fund them, at least in their entirety. LBOs can provide more options — but leveraging the business’s assets may bring its own risks.

Private equity firms, unlike banks, are often more likely to finance MBOs. We will explain how private equity can support a management buyout, as well as why investors might want to, in more detail below.

Finally, other types of funding include:

  • Hybrid forms of funding such as mezzanine funding, in which the owner has the right to convert the debt the buyer owes them to an equity interest in the company in case of default
  • Vendor financing, in which the seller provides some financial support for the buyers in exchange for a higher return in future
  • And, in rare cases in which the members of the management team executing the buyout can afford it, self-financing

Again, an MBO is a large and complex transaction, so it’s crucial to undertake a full financial analysis and explore which option is the best fit for the situation.

3) Closing the transaction and transferring ownership

With all the details in place and the funding agreed upon, the final step is to close the transaction and transfer ownership. With this, the MBO will be complete, and the management team who executed it will be the proud owners of the company.

How Private Equity Can Support an MBO

Private equity  can be an excellent source of funds for businesses. Startups and companies in their earliest stages can get off the ground with venture capital, while growth equity can be an excellent way for small and mid-sized operations to move up to the next level.

When financing buyouts, private equity firms usually expect an equity share of the company — and, by extension, may request some control over decision-making at the company in the future.

While some managers may chafe at this, it’s worth remembering that private equity investors have a huge interest in the company doing well, as their end goal is usually to make a profitable exit for their investors. To this end, most private equity investors are able to offer a range of support to investee companies in addition to the funding offered. Depending on the private equity firm, this could be relatively light touch, with board observers in place, for example. Or, this could go all the way through to hands-on active management of the company with ‘boots on the ground’ staff employed to help with the daily management of the company.

Why are Management Buyouts Attractive to Private Equity Investors?

Financing a management buyout can be a big ask. And, unlike venture capital investments, where early-stage companies can be very eager to take money, MBOs can also be very difficult to execute. This could be because managers know they have something worth investing in and take care to seek the right private equity partners to collaborate with.

Why, then, is a management buyout such an attractive prospect for so many investors? The answer is simple: because a well-executed MBO offers the chance to help shape a business’s success, and to achieve significant returns on investment.

We’ve already noted how investors achieve successful exits. In the Virgin Wines case cited above, for example, the investment generated more than seven and a half times the original outlay.

But there are other ways to make money too. Depending on the precise nature of the deal, an MBO can offer opportunities for capital growth as the business grows, with investors being potentially paid dividends before the final exit.

In addition, financing an MBO can offer investors the chance to exercise some control over the business and support the team in its strategic direction through board representation.

The specifics will depend on the particular deal struck.

Finally, the significant growth that can come out of a successful MBO can create further opportunities to generate profit. Investors may be able to take advantage of multiple arbitrage. Business Insider defines this as ‘increasing the value of a company between buying and selling it absent any operational improvements’ — by selling the individual company whose MBO they financed as part of a larger portfolio of companies, for example.

Financing an MBO can gain investors a lot, and is just one of the many ways that private equity investors can achieve good results for companies — and net high returns.

Benefits of Management Buyouts

Other potential benefits of management buyouts for private equity investors include:

  • Knowing what you’re getting, as the company you’re investing in is usually already established
  • Potentially less stringent regulations than if you were investing on the public stock market
  • Not needing to set up or bring in your own favoured management team, as you’re able to work with one that already knows the company

A management buyout is just one way that investors can help spur a company to grow. An MBO could be undertaken to rescue a distressed or underperforming company, or to take a successful one to the next stage.

Whatever the reasoning behind it, a management buyout can be the perfect way to allow a company to move forwards and grow while still benefiting from the expertise and skills of the existing management team.

If you would like to know more about private equity investment, management buyouts, and how you can get involved as a prospective investor, don’t hesitate to contact us.

Please note:
Private equity investments are high risk and speculative which means there is no guarantee of returns and investors should not invest unless they are prepared to lose all of their money. Past performance is not a reliable indicator of future performance. This type of investment is illiquid so can’t be easily accessed until the exit point. The investor is unlikely to be protected if something goes wrong.


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