Management buyout

Short description: Purchase of company by existing managers

Corporate finance

Working capital

* Cash conversion cycle
* Return on capital
* Economic value added
* Just-in-time
* Economic order quantity
* Discounts and allowances
* Factoring
* Reverse factoring

Sections

* Managerial finance
* Financial accounting
* Management accounting
* Mergers and acquisitions
* Balance sheet analysis
* Business plan
* Corporate action

Societal components

* Financial law
* Financial market
* Financial market participants
* Corporate finance
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* Clawback

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A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual.[1] Management and leveraged buyouts became noted phenomena of 1980s business economics and most frequently refer to leveraged transactions where managers take a company private.[2] These transactions, while originating in the United States, later spread to the United Kingdom and throughout the rest of Europe.[3] The venture capital industry has played a crucial role in the development of buyouts in Europe, especially in smaller deals in the UK, the Netherlands, and France.[4]

## Contents

* 1 Overview
* 2 Purpose
* 3 Financing
* 3.1 Debt financing
* 3.2 Private equity financing
* 3.3 Seller financing
* 4 Examples
* 5 See also
* 6 References
* 7 External links

## Overview

Some concerns about management buyouts are that the asymmetric information possessed by management may offer them unfair advantage relative to current owners. The impending possibility of an MBO may lead to principal–agent problems, moral hazard, and perhaps even the subtle downward manipulation of the stock price prior to sale via adverse information disclosure, including accelerated and aggressive loss recognition, public launching of questionable projects, and adverse earning surprises. These issues make recovery by shareholders who bring suit challenging the MBO more likely than challenges to other kinds of mergers and acquisitions.[5]

## Purpose

Management buyouts are conducted by management teams as they want to get the financial reward for the future development of the company more directly than they would do as employees only.[6] A management buyout can also be attractive for the seller as they can be assured that the future stand-alone company will have a dedicated management team thus providing continuity of operations and potentially increasing the likelihood of successful performance post-sale.[7] Additionally, in the case the management buyout is supported by a private equity fund (see below), private equity investors often participate in MBOs to support management and may be willing to pay an attractive price for the asset due to the existing team’s insider knowledge and commitment.[8]

## Financing

### Debt financing

The management of a company will not usually have the money available to buy the company outright themselves. They would first seek to borrow from a bank, provided the bank was willing to accept the risk. Management buyouts are frequently seen as too risky for a bank to finance the purchase through a loan.[9] Management teams are typically asked to invest an amount of capital that is significant to them personally, depending on the funding source/banks’ determination of the personal wealth of the management team.[10] The bank then loans the company the remaining portion of the amount paid to the owner.[11] Companies that proactively shop aggressive funding sources should qualify for total debt financing of at least four times (4×) cash flow.[12]

### Private equity financing

The European buyout market was worth €43.9bn in 2008, a 60% fall on the €108.2bn of deals in 2007. The last time the buyout market was at this level was in 2001 when it reached just €34bn.[13]

### Seller financing

In certain circumstances, it may be possible for the management and the original owner of the company to agree a deal whereby the seller finances the buyout. The price paid at the time of sale will be nominal, with the real price being paid over the following years out of the profits of the company. The timescale for the payment is typically 3–7 years.

This represents a disadvantage for the selling party, which must wait to receive its money after it has lost control of the company. It is also dependent, if an earn-out is used, on the returned profits being increased significantly following the acquisition, in order for the deal to represent a gain to the seller in comparison to the situation pre-sale.

The vendor agrees to vendor financing for tax reasons, as the consideration will be classified as capital gain rather than as income. It may also receive some other benefit such as a higher overall purchase price than would be obtained by a normal purchase.

The advantage for the management is that they do not need to become involved with private equity or a bank and will be left in control of the company once the consideration has been paid.

## Examples

A classic example of an MBO involved Springfield Remanufacturing Corporation, a former plant in Springfield, Missouri, owned by Navistar (at that time, International Harvester) which was in danger of being closed or sold to outside parties until its managers purchased the company.[14]

In the UK, New Look was the subject of a management buyout in 2004 by Tom Singh, the founder of the company who had floated it in 1998. He was backed by private equity houses Apax and Permira, who now own 60% of the company. An earlier example of this in the UK was the management buyout of Virgin Interactive from Viacom which was led by Mark Dyne.{{Citation needed|date=March 2026} The Virgin Group has undergone several management buyouts in recent years. On September 17, 2007, Richard Branson announced that the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from November 2007, will be known by a new name, Zavvi. On September 24, 2008, another part of the Virgin group, Virgin Comics underwent a management buyout and changed its name to Liquid Comics.[15] In the UK, Virgin Radio also underwent a similar process and became Absolute Radio.{{Citation needed|date=March 2026} In Australia, another group of music and entertainment stores were subject to a management buyout in September 2009, when Sanity's owner and founder, Brett Blundy, sold BB Retail Capital's Entertainment Division (including Sanity, and the Australian franchises of Virgin Entertainment and HMV) to the company's Head of Entertainment, Ray Itaoui. This was for an undisclosed sum, leaving Sanity Entertainment to become a private company in its own right.[16][17]

Hitman is a stealth video game series developed by the Danish company IO Interactive, which was previously published by Eidos Interactive and Square Enix. IO Interactive remained a subsidiary of Square Enix until 2017, when Square Enix started seeking sellers for the studio, IO Interactive completed a management buyout, regaining their independent status and retaining the rights for Hitman, in June 2017.[18]

## See also

* Takeover
* Management buy-in
* Leveraged buyout \- includes secondary buyout
* Envy ratio
* Outline of organizational theory

## References

1. ↑ "Management Buy-Out Definition & Examples". https://quickonomics.com/terms/management-buy-out/.
2. ↑ Wright, Mike; Thompson, Steve; Robbie, Ken (1992). "Venture capital and management-led, leveraged buyouts: a European perspective". Journal of Business Venturing 7 (1): 47–71.
3. ↑ Wehrly, Eric; Shen, Tuomi (2020). "Management Buyouts". The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan.
4. ↑ Wright, Mike; Thompson, Steve; Robbie, Ken (1992). "Venture capital and management-led, leveraged buyouts: a European perspective". Journal of Business Venturing 7 (1): 47–71.
5. ↑ Badawi, Adam B.; Webber, David H. (2015). "Does the Quality of the Plaintiffs' Law Firm Matter in Deal Litigation?". The Journal of Corporation Law 41 (2): 105. https://scholarship.law.bu.edu/cgi/viewcontent.cgi?article=1036&context=faculty_scholarship. Retrieved 19 November 2019.
6. ↑ "Understanding Management Buyouts (MBO): Definition, Benefits, and Example". https://www.investopedia.com/terms/m/mbo.asp.
7. ↑ "Management Buyouts: Advantages, Challenges and the Process". https://www.sweeneymiller.co.uk/corporate-and-commercial/mangement-buyouts-advantages-challenges-process/.
8. ↑ "Understanding Management Buyouts". https://www.connectioncapital.co.uk/understanding-alternatives/strategy-in-focus/management-buyouts-what-are-they-and-why-invest-in-one/.
9. ↑ "Management buyouts - How should your MBO be funded?". https://www.managementbuyout.co.uk/funding-an-mbo/.
10. ↑ "Management Buyouts: Examples & Financing Advice". https://saratogainvestmentcorp.com/articles/management-buyout/.
11. ↑ "Management buyouts –what are they & how do I finance one?". https://swoopfunding.com/uk/business-loans/management-buyout/.
12. ↑ "How Management Buyout Financing Works". https://sprintlaw.co.uk/articles/how-management-buyout-financing-works/.
13. ↑ "European buy-out market hits a seven year low, reports the Centre for Management Buy-out Research". 2009-02-23. http://www.nottingham.ac.uk/business/cmbor/Press/23February2009.html.
14. ↑ "Non-Profit & Public Sector Organizations Embrace Open-Book Management by Implementing the Great Game of Business". https://www.prweb.com/releases/non_profit_public_sector_organizations_embrace_open_book_management_by_implementing_the_great_game_of_business/prweb12461383.htm.
15. ↑ McNary, Dave (24 September 2008). "Virgin Comics now Liquid Comics". https://variety.com/2008/digital/markets-festivals/virgin-comics-now-liquid-comics-1117992793/.
16. ↑ Brandle, Lars (24 September 2009). "Australia's Sanity In Management Buyout". Billboard. http://www.billboard.biz/bbbiz/content_display/industry/news/e3i1224fdfbab2618f30d2dc43dba2b7464. Retrieved 15 March 2013.
17. ↑ Pallisco, Marc (26 September 2009). "Sanity Entertainment, owner of Virgin, HMV, sells to management team for undisclosed sum". RealEstateSource.com.au. http://www.realestatesource.com.au/sanity-entertainment-owner-of-virgin-hmv-sells-to-management-team-for-undisclosed-sum.html.
18. ↑ Osborn, Alex (16 June 2017). "E3 2017: IO Interactive Officially Goes Indie, Gains Full Rights to Hitman IP". http://www.ign.com/articles/2017/06/16/e3-2017-io-interactive-officially-goes-indie-gains-full-rights-to-hitman-ip.

## External links

* Definition of management buyout
* Definition of buy-in management buyout

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