Management buyouts (MBOs) remain an increasingly popular form of corporate restructuring, particularly in sectors such as technology, manufacturing, and hospitality.
Recent high-profile MBOs include the £100 million purchase of Pizza Hut by the firm’s senior leadership team, after a £60 million investment and rollout of an updated brand and menu.
But what exactly is an MBO, and when does this type of corporate restructuring make perfect business sense?
What is an MBO?
An MBO is a type of corporate restructuring in which a business’s management or senior leadership team purchases some or all of the company’s shareholding and becomes the new owner.
To complete an MBO, the buyers tend to work with a private equity firm or similar investor to facilitate a so-called “liquidity event”, which helps to realize the market value of a company’s shareholding and optimize future returns.
From a private equity perspective, MBOs are ideal as they typically incur lower levels of risk and enable them to tap into an experienced and knowledgeable management team that has already demonstrated its credentials in the relevant sector.
When Does an MBO Make Sense?
The question that remains, of course, is in which scenarios do a management buyout make sense? Here are some considerations to keep in mind:
● #1. When Management Teams Have Created Significant Value: A senior management or leadership team can be diverse in nature, but such groups will usually comprise a broad and impressive skillset. Often, it’s this team that has created the real and tangible value in a business, so an MBO puts the leadership in a position to determine the strategic future of the venture and incentivizes them to achieve optimal growth over time.
● #2. When Management Teams Have Been Groomed for Success: Around 99% of UK SMEs are small and medium-sized ventures, many of which are owned by the founder and have a core management team that has been groomed for success. In this instance, succession plans are often built around a future MBO, in order to enable continuity within the business and place the company in the hands of an inherently capable leadership team.
● #3. When a Deal Needs to Be Done Quickly: When an existing owner or founder decides to sell their business, there’s little doubt that an MBO ensures a quicker, cheaper, and more efficient transaction. Certainly, less time and money is spent on the legal side of the deal (such as negotiating warranties) through a management buyout, while this also makes such deals attractive to private equity investment teams and similar funders.
Featured image: Unsplash (Alvaro Reyes).