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Management Buy Out - how it works, advantages and risks



Sat 30 December 2023 Management Buy Out - how it works, advantages and risks

What is an MBO?

A Management Buy-Out (MBO) is a transaction where a company's management team acquires ownership of the business from the existing shareholders. This allows the managers to become owners and steer the company in their desired direction. MBOs can be attractive for both the management team and the sellers, offering potential benefits like:

How does an MBO work?

  1. Planning and Valuation - the management team, often with advisors, assesses the target company's value, feasibility of the buyout, and financing options.
  2. Funding - secure funding to purchase the company, typically through a combination of debt, equity, and personal investment from the management team.
  3. Negotiation and Due Diligence - both parties finalize the transaction terms and conduct comprehensive due diligence to uncover any potential liabilities or risks.
  4. Legal Documentation - a series of legal documents are drafted and signed, including the share purchase agreement, loan agreements, and shareholder agreements.
  5. Completion - the transaction is completed, ownership transfers, and the management team takes control of the company.

Advantages of an MBO

An MBO can offer several advantages for both the management team and the sellers, making it a compelling option in certain situations. Here's a breakdown of the key benefits:

For the Management Team:

For the Sellers:

Additional Advantages:

However, it's important to consider that MBOs also involve challenges and risks. Careful planning, experienced advisors, and thorough due diligence are crucial for maximizing the advantages and mitigating potential drawbacks.

Key Legal Documents and Clauses

Important Clauses

Funding an MBO

 


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