Management Buyout (MBO)

A Management Buyout (MBO) is a takeover strategy in which the existing management team purchases all or part of the company from the current owners. This type of transaction is often used when the owners wish to retire but want to ensure that the business remains in capable hands.

An MBO can be financed through the managers' own equity as well as external financing (e.g., from banks or private equity investors). In many cases, the purchase is made through a specially created company, known as NewCo, which takes ownership of the company shares.

Advantages of an MBO:

• The existing management is already familiar with the company, its customers, and processes.
• Ensures continuity and reduces risks associated with external buyers.
• Provides a strong incentive for the management team to increase the company's value over time.

Example:

A family business plans to sell the company. The existing management team decides to take over the business and conducts a management buyout. The purchase is funded partly through equity and partly through a bank loan.