Management Buy-Out (MBO): How can a company's management take control?
If a company owner wishes to sell their business, how can they do so to maximize their return while ensuring the buyer \"jumps on a moving train\"? One solution may be a management buy-out (MBO) – the sale of the company to its existing management. This strategic move facilitates a smooth transition of ownership while ensuring continuity in the management of the company.
What is a management buy-out?
A management buy-out refers to the acquisition of a company by its current management. The managers of the company, who are intimately familiar with the business and its potential, become the new owners. An MBO typically involves a combination of the managers' own funds and external financing, enabling the transaction to often exceed their personal financial capabilities.
Example: A family manufacturing company with a turnover of 200 million CZK is seeking a succession solution, as the founder wishes to pursue other activities and their children are not interested in taking over the company. The three-member management team, which has been with the company for over 10 years, offers to buy the company for 120 million CZK, with 20 million coming from their own funds and 100 million obtained through a bank loan.
When is an MBO a suitable solution?
A management buy-out is particularly suitable in the following situations:
1. Generational change in family businesses - owners plan to retire and do not have suitable successors in the family but want to ensure business continuity.
2. Divestiture of non-strategic parts of larger corporations - a large company divests divisions or subsidiaries that no longer fit its strategy but are viable as standalone units.
3. Restructuring of indebted companies - in situations where the current management sees potential for revitalizing a business that the current owners no longer wish or are unable to develop further.
Example: A multinational corporation decides to sell its Czech subsidiary, which specializes in software development for the banking sector. Although this division is profitable, it no longer fits the corporation's global strategy. The local management, which understands the value of the client portfolio and the potential for further growth, organizes an MBO with the support of a local private equity fund. The transaction is straightforward, and there is no need for legal due diligence, as the management is well acquainted with the business.
Key aspects of an MBO
When planning and executing a management buy-out, attention must be paid to the following factors:
a) Transaction financing
A successful MBO requires a well-thought-out financial structure. The following sources are commonly used:
· Management's own funds (typically 10-30% of the transaction value)
· Bank loans (senior debt)
· Subordinated financing (mezzanine)
· Private equity or venture capital investors
· Seller financing (vendor financing)
· Financial assistance – a special case where the acquired company provides a loan or collateral
b) Company valuation
Determining a fair price is a critical aspect of any MBO. MBO is characterized by the management having a better understanding of the company's performance and potential, leading to information asymmetry. Therefore, it is common to use an independent third-party valuation, which can help reach an agreement acceptable to both parties.
c) Legal structure of the transaction
An MBO can be structured in several ways:
· Direct purchase of shares in the company
· Establishment of a new company (SPV - Special Purpose Vehicle), which subsequently purchases the target company
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