A management buy-out (MBO) is the purchase of a company by its existing management. The managers buy at least a large part of the shares or the whole company. Frequently the management team wants to gain independence and a chance to influence the future strategy of the business in order to achieve a capital gain by increasing the value of the company.
Given that they are now investing their own equity, they tend to be highly motivated. Often the management will take the company private in order to avoid the duties and costs connected with being public. Another reason for the existing management to go for a management buy-out would be to save their jobs.
The business would otherwise be shut down or sold to another company that would exchange the management. Since the managers of a company usually don’t have enough money to finance the purchase themselves, the main challenge of a management buy-out is its financing.
If the purchase is mainly financed by debt—either bank loans or bonds—the transaction can also be referred to as a leveraged buy-out (LBO). Another source of funds can be derived from private equity investors who get part of the shares in return for the capital invested.
However, private equity investors tend to have different aims compared to the management. The latter will take a long-term view, whereas private equity investors want to maximize their returns by making an exit after a few years. In the meantime, they will impose certain terms on the management about the way the company should be run.