Venture Capital

A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company.

If the owners (the existing shareholders) of a business want to sell, the existing management are often the people in the best position buy them out and take the business forward. They know the business and are therefore in a strong position both to value it and continue to run it. You may also take the view that they will work harder for themselves than for other people.

MBOs are often carried out by a consortium of the current management and external backers. MBOs generally require more capital than a start-up and often are financed by venture capital or private equity firms, with or without vendor financing.

Management buyouts are similar in all major legal aspects to any other acquisitions of a company. The particular nature of the MBO lies in the position of the buyers as managers the due diligence of the company, and the practical consequences that follow from that. In particular, the due diligence is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is often unlikely to give any but the most basic warranties to the management, on the basis that the management know more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company. This is usually a highly negotiable issue.

If a business is under-performing due to bad management, a management buy-in may be preferable. This is the purchase of a business by new shareholders who include new management.

Buy-outs are now one of the most popular forms of acquisition. A management buy-out (MBO) is usually an exciting, once-in-a-lifetime opportunity for managers to own a significant stake in their business. But it can also be a major distraction. The management team must resolve many important issues regarding the structure of the transaction, funding (equity and debt), conflicts of interest, and confidentiality while attending to the normal running of the business.


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