Management Buyout (MBO)
An acquisition where the existing management team purchases the business, often with private equity backing.
Full Definition
A Management Buyout (MBO) is a transaction where a company's existing management team acquires the business from its current owners, typically using a combination of personal funds, debt financing, and private equity investment.
Typical MBO structure:
- Management team: 10-30% equity stake
- Private equity: 40-60% equity investment
- Debt financing: 30-50% of acquisition price
- Vendor loan notes: Sometimes part of consideration
Why MBOs happen:
- Owner retirement or exit
- Corporate divestment of non-core division
- Succession planning
- Unlock value with aligned ownership
Advantages:
- Continuity of management
- Reduced business disruption
- Management's deep knowledge reduces risk
- Motivated ownership team
Key considerations:
- Management conflicts of interest (duty to seller vs personal interest)
- Independent valuation often required
- Governance and documentation of process
- Tax structuring for management
UK-specific points:
- EMI share options can provide tax-efficient management incentives
- HMRC scrutiny of management sweet equity
- Financial assistance rules must be navigated
- Private equity typically expects 3-5 year exit horizon
Related Terms
Private Equity
Investment funds that acquire equity stakes in private companies, typically seeking value creation and exit within 3-7 years.
Acquisition
The purchase of one company by another, where the acquiring company takes control of the target business.
Vendor Loan Notes
Debt instruments issued to the seller as part of the purchase price, representing deferred payment obligations.