What is an MBO?
A Management Buy-Out (MBO) is a financial transaction in which a company’s existing management team acquires a controlling ownership and day-to-day operations from its current owners.
The team may have already had this degree of control without formal ownership in many cases.
The motivation behind an MBO may vary, but it can include factors such as a desire for greater autonomy, a belief in the company’s potential, or an opportunity to unlock value by implementing changes without interference from external owners.
MBOs usually involve a complex process that includes negotiations on the purchase price, financing arrangements, due diligence, legal documentation, and other considerations.
External financing will typically be obtained from a combination of debt finance, deferred consideration and the management team itself. Larger deals may require an equity contribution from venture capital firms or other investors.
However, MBOs can also involve risks and challenges, such as securing financing, managing the ownership transition, and achieving the expected financial performance and returns on investment.
MBO opportunities don’t present themselves very often. Despite the financial commitment and hard work, most employees are prepared to take the risk as they appreciate that true long-term value won’t be achieved in a salaried-only position.
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Also, MBO’s aren’t just for large businesses. MBO’s are particularly common for smaller businesses, especially in the transfer of family businesses over generations.
Smaller businesses are less attractive to trade buyers, therefore in many cases a MBO may be the owners only realistic exit route.
At Sterling Commercial Finance, most of the MBO’s we conclude are in respect of family businesses in the £500k to £10m turnover range.