A2 Objectives and Strategy – Unit 6

Management buyouts (MBO)

Management buyouts

• The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it.

Methods of finance for buyouts

• Managers personal funds

• Bank loans

• Investment funds obtained by selling shares to employees

• The most common is, venture capitalists or private equity firms lend the MBO by taking a stake in the business for a return of about 25-30% over 3-5 years

Reasons for buyouts

• Large businesses may sell off a small section to raise cash, refocus, or get rid of an unprofitable activity. Management may feel this activity could be run profitably in a different way or more finance

• Family owned companies may prefer to sell to the existing management hope of maintaining employment and consistency

• Firm may be in hands of receivers and selling part of business to managers will raise finance to pay creditors

Information sourced from http://www.chorion.co.uk www.bbc.co.uk

Finance

Reason sold

Information sourced from www.bbc.co.uk and www.peacocks.co.uk

Finance

Reason for sale

Rewards of buyouts• Management and employees have more motivation and

responsibility

• No owner manager conflict so objectives may be clearer

• Less bureaucracy as no head office so no hindering progress

• Profits will not be diverted to another part of the organisation

• If successful the company may be floated on stock market or selling shares in a takeover offer

Risks of buyouts

• Personal losses for new owners if unsuccessful

• Original owners may have been right to sell if unprofitable. Why will it change?

• Little access to capital?

• Considerable rationalisation and job losses may follow, therefore adverse morale

Are buyouts a good thing?

• 314 MBOs completed in the first half of 2004 – 12 a week – total value of £7.6 billion

• Some say if managers see value in the firm they should deliver it to the shareholders

• Workers may be more at risk than if owned by a larger firm

• Jobs may not have existed if there had been no MBO