Management Buyout (MBO)

Management buyouts occur when owners want to sell, such as founders retiring, parent companies selling divisions or public companies going private, and the management team believes in the business's future.

Managers rarely have enough money to buy the company themselves. They typically invest some of their own money and partner with a private equity firm, which provides most of the equity, while banks provide debt. Managers often receive a larger share of the equity than their investment alone would justify, as an incentive.

For example, the management team of a division of a large group might buy it for 50,000,000, investing 2,000,000 of their own money alongside 18,000,000 from a private equity firm and 30,000,000 of bank debt.

MBOs offer continuity, since managers already know the business, and can motivate managers strongly as owners. Concerns include conflicts of interest, because managers know more about the business than the sellers and benefit from a lower price. A management buy-in is a related transaction, where outside managers buy the business.