Management buy-out approach

Essentially, a management buy-out (MBO) is the purchase of a business by its existing management, usually in cooperation with outside financiers. Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners normally sell most or usually all of their investment to the managers and their co-investors. Often the group of managers involved establish a new holding company, which then effectively purchases the shares of the target company.



Typical reasons for the purchase of a business by its existing management include:

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Certain parts of an organization are no longer seen as a core competence / no core activity by its parent company
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A company is in financial distress and 'needs the cash'
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Parts of acquisitions that are not wanted
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In case of a family business: succession issues through retirement of the owner
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The management team stand to gain independence and autonomy, a chance to influence the strategy and future direction of the company and the prospect of a capital gain.

Attractiveness of the Management buy-out approach to a seller?

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Speed – An MBO can be much quicker than a trade sale.
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Strategic considerations – For example the selling party may not wish competitors to acquire control.
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Confidentiality – The selling party may not wish to let competitors have access to sensitive information that would be disclosed during a trade sale process.
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Familiarity - With an MBO the selling party can continue to deal with a management team with whom it has an established relationship.
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Pricing

Feasibility of a Management Buy-out? Typical criteria are:

1.

Sound and well-balanced management team,
2.

Business must be commercially viable as a stand alone entity,
3.

Willing vendor,
4.

Realistic price (Valuation... Discounted Cash Flows, Net Asset valuation, Price Earnings ratios),
5.

Buy-out must be capable of supporting an appropriate funding structure.


The typical steps in a management buy-out process are:

* Agreement in the management team as to who will become the managing director;
* Appointment of financial consultants;
* Assessment of the suitability of the buy-out;
* Approval to pursue the MBO;
* Evaluation of the seller's asking price;
* Formulation of business plan(s);
* Selection of equity advisors and obtaining written offers;
* Selection of legal consultants;
* Selection of lead investor;
* Negotiation of best equity deal;
* Negotiation of purchase of the business;
* Selection of auditors.
* Implementation of a due diligence test;
* Obtaining finance and other equity investment;
* Preparation of legal documents;
* Legal ownership achieved.
 
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