Management Buyout

What is a Management Buyout?

A management buyout or MBO definition can be defined as the transaction, in which the management of the organization buys the assets of the company. Professional managers that have active participation in the company’s management and daily operations can invest in the operations and fixed assets of the company. This practice is quite common for large-scale companies that are owned and operated by the owner who plans on retiring. It is often seen as the exit strategy that allows the owner of the firm to retire by selling the management, operations, and assets of the company to the manager.

In other words, management buyout is a financial transaction. It is definitely one of the most lucrative investment options for the management team as they get a golden opportunity to transform from being the employees to the owner of the company. However, it isn’t a small or short-term transaction. The management has to invest a substantial amount to get the ownership title of a large corporation. Besides that, the transition from the staff to the owner isn’t as easy as it sounds. The title comes with a set of unique responsibilities and challenges.

Difference Between MBO, MBI, and LMBO

A management buyout is the opposite of the buy-in practice, in which the outsiders acquire the company and set a new management team. In the former, the management team of the company gets full control over the firm’s assets, operations, and decisions. Buy-in, on the other hand, gives the ownership title of the company to the external team that acquires the company and changes the management team. LMBO is another common practice where the management team of the organization uses its fixed assets as the security for a debt.

Basically, the company’s assets are used as the Collateral for obtaining a substantial loan from the banks. A management buyout is better than LMBO (leveraged management buyout) as the former doesn’t raise the debt. It gives the management team full flexibility and control over the finances, assets, and business operations. MBO is better than the management buy-in as the former involved the existing managers that are well-familiar with the company’s objectives and functioning. They know how to run the company and manage the daily operations. There is no Learning Curve involved. If the company is acquired by an outsider, then they will bring a new management team. It could take them a long time to learn the company’s objectives.

Benefits of Management Buyout

The best example of MBO transaction is the transition of the Dell Company to a private firm. Michael Dell invested $25 billion in the company to transform it into a private firm so that he gets better control over the firm’s operations and management practices. MBO is a perfect investment option for investors and professional financiers. It gives you full flexibility to run the company on your own terms. It also helps streamline the management operations. It seems to be a lucrative investment opportunity for the managers as it gives them more control over the firm