A MANAGEMENT buyout (MBO) is a type of acquisition where a company's existing managers acquire a large part, or all, of the company.
MBOs are increasing in number again after a credit crunch-related lull. While they may not all be on the scale of the $24 billion MBO recently undertaken by Michael Dell to regain control of Dell computers, they are a key category of corporate transaction.
Critical to any proposed MBO is funding. This can come from a range of funding providers, including the company's managers, banks, private equity investors or, increasingly, the vendor shareholders in the form of vendor loans. No matter how much goodwill there is between the parties, an MBO will not happen without funding.
Rigorous due diligence is still needed, regardless of the management's knowledge of and involvement in the business. It is important that this process is conducted thoroughly. Some may not see the merit in meticulous due diligence if they have been involved in the management of the business for years, but external investors will always want to know what they are funding. Similarly, sellers may be reluctant to offer anything but the most basic of warranties on the basis that the management should know plenty about the company.
There are many legal factors to consider when proceeding with an MBO. Managers need to reconcile their participation with their existing duties as directors and employees. Conflicts of interest are likely and will need to be dealt with depending upon the individual circumstances. There are also likely to be significant tax ramifications which both sellers and purchasers need to be aware of.
Variations on a theme include a management buy-in (MBI), where a new management team is parachuted into the target company, and a vendor initiated management buyout (VIMBO), in which the vendor proactively promotes the sale of the company to management as part of an exit or retirement strategy.
Anyone thinking of taking part in an MBO should seek sound legal and accounting advice. Solicitors work closely with accountants to ensure that what can be a complex transaction is completed as smoothly as possible.
