Sometimes, accompany wants to sell their business or want to offer equity to some shareholders. As a result, they can invite investors and offer them the shares of a company. On the other hand, if the management is competent and skilful to manage a company, they join hands and buy the company’s shares as a management buyout and become the partial or full owner of the company.
Attracted by many incentives, the management pools their resources and buys the shares of a company. However, many other factors along with the control over the company contribute to the decision of the company’s equity. Let’s discuss what Management buyout (MBO) is and why it is important. Moreover, we will shed light on the advantages and disadvantages of a Management Buyout.
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What is Management Buyout (MBO)?
A management buyout, as the name suggests, is the acquisition of a company by purchasing the company and its operations by the management of that company. The professional management takes this decision on the potential growth and profitability of an organisation.
In this process, the competent and qualified management acquires control over the decision-making process after they have pooled the required resources to buy the company. As the company goes private, the company can work to increase its profitability and sales, ultimately going for an Initial Public Offering (IPO) at a much higher valuation.
Why is the Management Buyout (MBO) important?
A management buyout is important for various reasons. Although a publicly listed company or a private firm can be owned by investors or businessmen, the motives for management are far more reasonable and superior. Management purchase of a company becomes inevitable when it fails to carry out its operations due to the higher costs and not getting enough equity from the third-party investors and shareholders.
On the other hand, the transfer of ownership is much smoother than any other ownership transfer procedure. The registration and other associated costs are lower than other buyouts. Similarly, the management is already overlooking the business and thus they are more likely to run the business operations in continuation and more successfully and efficiently.
How a Management Buyout is conducted?
An MBO is conducted after a thorough feasibility study of a company. Moreover, the management team is analysed for its potential and the capability to manage a company. Moreover, the financing factor is also a part of this process. For example, how the management team will finance the buying of a company.
- Choose the right people who have the same vision, values and goals, avoiding any potential conflict in the future.
- Handover and transfer all the operational responsibilities to the management.
- Negotiate a fair price and reach a deal.
- Business Valuation
- MBO financing
Advantages and Disadvantages of Management Buyouts
Although there are many advantages of management purchasing a company, the disadvantages cannot be utterly ignored. So, let’s discuss the pros and cons of management buyout!
Advantages
MBOs are preferable if the hedge funds are going to finance the company in the selling process. This is because they will offer an attractive price for the assets. With it, the company will go private and can streamline the business operation smoothly, increasing the profitability of the company.
A smooth transition process is just another advantage of these types of buyouts. The lack of time or resources will make this choice more attractive and the transfer will be made quickly.
Similarly, the management is already aware of the company and can take over the company, making the key decisions as they already understand the company’s performance and its operations.
A management team can pool resources via debt financing, seller financing and equity financing. So, they can pool resources quickly from various sources. It will grow the interest of the managers in the company and they can work hard to thrive in the business.
Disadvantages
A management team cannot qualify as an entrepreneur in every case. So, the risks are also a part of an MBO when the management team fails to make key decisions as an entrepreneur.
Next, the owners of the company may not be aware of the actual price of the assets and the management team will be tempted to downplay and tweak the price to their own advantage.
Final Thoughts
So, we can say that MBOs are important as they make the transfer of a company quick and smooth. The ownership transfer is quick and the management can manage a company as an entrepreneur. Moreover, the management team can pool the resources from different sources.
Both publicly listed and private companies can use the option of a management buyout. However, the status of a public company will change to a private company. The benefit of an MBO is that the management can streamline the business operation more efficiently, as a result, the company is likely to increase its profits.
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Disclaimer: The information provided about what is management buyout in this article is general in nature. It does not intend to disregard any of the professional advice.