Meaning Of Management Buyout
Management buyout (MBO) is an act of a company’s management purchasing the operations and assets of the business. This concept appeals to the higher level managers owing to the greater rewards they will receive by owning the business rather than serving as employees. MBO primarily takes place in private businesses where the owner wishes to retire. Large businesses who wish to sell out the redundant divisions of their entity also opt for MBO.
On understanding the meaning of MBO, let’s have a look at the process for commencing the same.
- Meaning Of Management Buyout
- Process Of Management Buyout
- Advantages Of Management Buyout
- Disadvantages Of Management Buyout
- Example Of Management Buyout
Process Of Management Buyout
Management buyouts are a popular form of exit strategy adopted by both large corporates as well as owner managed businesses. After considering if the MBO is suitable for the owner, a number of steps need to be commenced.
The following are the eight steps in the management buyout process:
Assess the Opportunity
The buyer should be sure about going ahead with the MBO. An investment equivalent to a year’s salary will be required. If the finance is borrowed, the repayment will be manageable as the salary can increase in the future to help pay off dues. However, the buyer will have to bear the risk on capital investment of the business. Full commitment towards the business is required at the buyer’s end.
Assess the Viability of the Deal
Analyse the growth prospects of the business. The buyer should also work out a plan towards wealth maximization. This will enable the buyer to grow the value of his shareholding in the business.
Create a Credible Business Plan
The buyer should draft a worthy business plan. Decisions on actions to be taken once deal is done should be chalked out. A good business plan will determine the initial budget needed for the operations of the business.
Make an Agreement with the Seller
Negotiations with the seller are done. A middleman may be involved to negotiate and reach a common ground as these negotiations may get uptight.
Raising finance for the deal is a time-consuming process. Striking a good deal is essential. Raising capital from an external source is equivalent to developing a business partner. Thus the buyer must make a wise decision.
Conduct Due Diligence
Financiers may require a due diligence to support the process. Therefore, buyer must conduct the due diligence for the company.
Close the Deal
The buyer seals the deal and enjoys benefits. Hard work will follow in the days to come.
Build the Company
The company is in the ownership of the buyer. If the deal is conducted wisely and at the right price, it serves as a great beginning. Appointment of a good adviser may help in further operations of the entity.
After gaining an insight into the process of MBO, let’s have a look at the advantages and disadvantages for the same.
Advantages Of Management Buyout
The following are the advantages of management buyouts:
- MBO enables a better and more effective management.
- It encourages better performance and commitment from the members involved.
- It leads to reorganization of the organizational structure. This thereby results in identification and removal of deficiencies in the operations.
Disadvantages Of Management Buyout
The following are disadvantages of management buyout:
- MBO requires fixing of individual responsibilities and goals. However, an organization functions with a group effort.
- MBO is a time-consuming process.
- It compares ratings of individuals. However, this may deem to be unfair as every individual has different goals.
- MBO requires a level of trust throughout the hierarchy of the organization. This is difficult to achieve in the corporate world.
- It is suitable for professional and managerial jobs. It is not applicable for worker-level jobs.
Let’s move on and see an example of MBO to gain a clearer view of the concept.
Example Of Management Buyout
In year 2011, management of Menzies Hotel purchased the entity. Lloyds Banking Group provided financial assistance in the MBO. The hotel went through financial restructuring and formed a new company, Cordial Hotels which is majority-owned by its management.
A management buyout ensures a smooth continuation for the entity. The transfer of ownership is to the management who already has a good understanding of the potential held by the company. The management is already well-known by suppliers, financial partners, and clients. These multiple benefits lead to profit maximization for the entity. However, the management buyout structure holds a setback as well. The managers are required to make a transition from being employees to owners. This transition requires a change in the mind-sets. Not all managers can become successful owners.1,2