how to approach a management buyout
a successful mbo requires a great deal of planning and preparation as such it should never be undertaken hastily the following are a few factors that should be considered in the process any type of financial transaction should be well researched as such management should craft a plan or proposal that s fully thought out and conceived some points to add include it s always a good idea for management to show the company s owner s that they ve done their homework this includes carrying out a thorough valuation analysis and to carry out full due diligence even though the managers currently work at the company there may be hidden problems like outstanding litigation that they don t know about a significant amount of money is required for an mbo because of the sheer size there are a few different sources that management can turn to in order to secure capital for the deal management should do their due diligence while considering an mbo this includes a full evaluation of the company and its financial and legal framework advantages and disadvantages of an mbomanagement buyouts are considered good investment opportunities by hedge funds and large financiers who usually encourage the company to go private so that it can streamline operations and improve profitability away from the public eye they are encouraged to go public at a much higher valuation down the road a private equity fund that supports an mbo will likely pay an attractive price for the asset provided there is a dedicated management team in place there are several drawbacks to the mbo structure as well while the management team can reap the rewards of ownership they have to make the transition from being employees to owners which requires a change in mindset from managerial to entrepreneurial not all managers may be successful in making this transition the seller may also not realize the best price for the asset sale in an mbo the managers have a potential conflict of interest if the existing management team is serious about bidding on the assets or operations being divested put simply they could downplay or deliberately sabotage the future prospects of the assets that are for sale to buy them at a relatively low price good investment opportunity for management and private equity hedge fundsprivate equity funds may pay a good price depending on the circumstancestransition for owners and employees may be toughcan result in a conflict of interestmanagement buyout mbo vs management buy in mbi the opposite of an mbo is a management buy in mbi while an mbo involves a company s internal management purchasing the operations an mbi takes place when an external management team acquires a company and replaces the existing management team mbis involve companies that are led by poor management teams or are undervalued an mbo s advantage over an mbi is that as the existing managers are acquiring the business they have a much better understanding of it and there is no learning curve involved which would be the case if it were being run by a new set of managers mbos are conducted by management teams that want to get the financial reward for the future development of the company more directly than they would do only as employees while private equity funds may participate in mbos their preference may be for mbis where the companies are run by managers they know rather than the incumbent management team example of an mboone prime example of a management buyout involves the computer and technology company dell in 2013 founder michael dell and a private equity firm silver lake partners paid shareholders 25 billion as part of a management buyout dell took the company private so he could exert more control over the direction of the company 1 the company went public again in december 2018 shares trade on the new york stock exchange nyse under the ticker symbol dell 2