Management Buyout (MBO)
A management buyout (abbreviation: MBO) is a specific form of succession planning for a company. The company’s own management purchases the business from the owner. This typically involves the executive board or senior executives. Experience shows that this primarily involves a sale to the existing management. The management buyout (MBO) plays a significant role in succession planning, particularly among small and medium-sized enterprises (SMEs).
Particularly in “long-established” family-owned businesses, when there are no suitable or willing successors within the family, the company is often sold to the existing management in order to ensure the company’s continued existence and continuity in corporate leadership. The advantage of a management buyout (MBO) is that the company’s management is familiar with the business’s structures, which usually facilitates the sale negotiations due to the existing relationships among the individuals involved. Problems, however, often arise in connection with financing the purchase price, as potential buyers typically have a high need for debt financing.
The managers’ character and strategy must be convincing in an MBO
According to current figures from the IfM Bonn, succession planning is on the horizon for approximately 150,000 family-owned businesses between 2018 and 2022. For about 47% of these companies, an external succession solution must be found, as the business owner cannot ensure succession within the family. Furthermore, the business stake often accounts for 80%–90% of total assets, and there is insufficient capital available to secure retirement benefits. In such situations, the employees of the company itself are often the first point of contact for business succession.
It is not uncommon for companies to decide, for strategic reasons, to sell off parts of the business that can thrive better in a new environment. Here, too, the company’s executives are attractive potential buyers. In our experience, the passion, commitment, authenticity, and a certain willingness to take risks on the part of the current management determine whether such an MBO can be successfully implemented. Whether one of the greatest challenges in this context—namely, financing the purchase price or finding investors—can be overcome depends on the persuasive power of the management team and the strategy they have developed. A fundamental prerequisite for a successful MBO is that the company has sufficient financial resources and is experiencing stable growth.
The Pillars of Sound Management Buyout Financing
Unlike a traditional company sale, in which third parties act as buyers, in a management buyout (MBO), the current management purchases the company’s shares. To put together a viable financing plan, expert advice is therefore essential. The need to raise additional equity arises from the fact that the acquiring management team generally does not have the necessary funds to finance the full purchase price.
Assuming the existing shareholders are willing to take on a high level of risk, an owner loan is the simplest form of financing for an MBO. Repayments are typically made from the company’s earnings. But be careful—very often, the existing shareholders secure significant veto power in this process, which can certainly lead to conflicts regarding the company’s future direction. If a bank finances the difference between the purchase price, the managers’ equity, and the owner loan, this results in fewer friction losses in practice. In this scenario, however, most banks will require the owner loan to be subordinated.
Another viable source of financing for an MBO is raising private equity. This can sustainably improve a company’s equity base—particularly in the interest of creditworthiness. Private equity firms invest almost exclusively in unlisted companies and thus represent an important potential source of financing for an MBO. Unlike banks, the goal of such investments—in addition to earning a return on capital—is to secure an active say in the company’s management in order to prepare for a lucrative exit. Nevertheless, this type of financing can have a very positive impact due to the firm’s extensive network and associated industry expertise.
In summary, it should be noted that, as a prerequisite for a successful management buyout (MBO) in all financing structures, the terms—including financing shares and voting rights—should be tailored to each individual case.
This glossary entry was created in collaboration with: Karl Rehfuß, Partner at K.E.R.N – The Succession Specialists in Stuttgart