What is a Management Buy-Out?

An MBO, or management buyout, is when the control and ownership of a corporation is taken over by its existing management team. A Management buyout is similar to any other type of acquisition or take-over only, in this case, the take-over is from within by existing employees of the business. A management team will have a deeper understanding of a corporation’s inner workings and operations that can be of a significant advantage when competing with other potential buyers.

There are two primary ways of financing a management buy-out. One option is through debt financing. In this case, the management team will approach a bank who may lend them the required capital. If a bank is unwilling to lend the management team the necessary finances, private equity sources may be interested in backing the team. In this case, the management will continue to operate the business on behalf of the new equity partners.

A management team may be willing to finance the buy-out through personal financing or by borrowing against personal assets – such as real estate. However, it is rare that the management team will be able to raise enough private capital if the corporation being bought-out is of a significant size. They may in fact consider this strategy in order to gain at least a small percentage of the ownership and thereby benefit from a future rise in the corporation’s market value. If they are confident enough that, under the former leadership, the corporation was under-performing, then owning a piece of the equity could, in the long-run, be extremely valuable.

In cases where manager do not have enough personal financing and the banks have been unwilling to support them, management teams have often used mezzanine debt as a source of capital to fund the MBO.