What is Management Buyout?
A Management Buyout (MBO) is a leveraged buyout transaction structure in which a significant portion of the post-LBO equity contribution comes from the prior management team.
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How Does a Management Buyout (MBO) Work?
Management buyouts are transactions where the management team is actively involved in the partial or full acquisition of the company they currently manage.
The sources of funding are usually obtained from the following:
- Senior Debt Lenders → e.g. Traditional Banks, Institutional Investors, Direct Lenders
- Subordinated Debt Lenders → e.g. Mezzanine Debt, Hybrid Financing Instruments
- Equity Contributions → e.g. Financial Sponsor Contribution, Rollover Equity
From the perspective of the financial sponsor, the rollover equity by management is a “source” of funds that reduce:
- Debt Financing → The total amount of debt funding needed to be raised
- Equity Contribution → The equity contribution by the private equity firm
What is the Financing Structure of an MBO?
If a management team decides to rollover part of its equity into the new post-LBO entity, it is generally because they are under the belief that the risk undertaken by participating is worth the potential upside.
In the case of an MBO, it is the management that is most often the one initiating the discussions surrounding a take-private with private equity firms and lenders.
The catalyst for a management buyout (MBO) is more often than not an unhappy management team.
After receiving criticism under current ownership or due to being a publicly traded company, the management team can decide the company could be run better under their guidance (and without external distractions such as constant pressure from shareholders or negative press coverage).
Hence, management buyouts coincide with lackluster performance, negative investor sentiment, and scrutiny from the shareholder base (and other participants in the public markets) in practically all cases.
In an MBO, management is essentially taking over the company that they manage, which sounds contradictory but implies management has lost control over the company and its current trajectory.
Therefore, the management team seeks the support of institutional equity investors, namely private equity firms, to complete a transaction and acquire the company.