This type of exit plan is very straightforward. An MBO is when a company’s management team purchases the assets and operations of the business they manage. Strategically speaking, this type of exit strategy is very appealing to professional managers because of the greater potential rewards and control that comes from being an owner vs. employee.
Advantages of a Management Buyout
MBOs are viewed as a good investment for hedge funds and large financiers. This encourages the company to streamline operations and improve their profitability. In doing so, the company can go public later on at a much higher valuation. If you are the owner, or one of the owners of a company, and have the opportunity for an MBO, there will likely be an attractive price for your assets (shares and other items). However, some private equity funds may not push for the incumbent management team to take over the company. They may prefer the company is run by managers they know and have worked with in the past to achieve the financial goals they have.
Disadvantages of a Management Buyout
Not everyone is made for a managerial role, let alone a co-owner of a major corporation. The transition from being an employee to being an owner can be difficult for some, as it requires a change from a managerial mindset to an entrepreneurial one. Another potential issue that could arise is an overall conflict of interest the management team may have. If the management team is a serious bidder and knows the value of the assets the owner currently possesses, they could deliberately sabotage the future growth of said assets in order to buy them at a relatively low price.
Frequently Asked Questions
Do you have questions about exiting your business? You should consider checking out our Resource Navigator. It houses the contact information of 400 of our most helpful partners from across the state who provide free to low-cost assistance to Iowa entrepreneurs and small business owners.
Q: What is a management buyout (MBO)?
A: An MBO is when a company’s management team purchases the assets and operations of the business they manage.
Q: Is selling your company to your hired managers a good idea?
A: This depends on your management team and if they are qualified to take your place.
Q: Are there risks when selling your business to your management team?
A: Yes. One example could be self-sabotage of the business by way of the management team. If you are working on a price point to sell to the managers, and they partake in lowering the value of the business on purpose, you will receive less for your share of the company when you really could have gotten more.
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