In the modern business landscape, management teams are more commonly buying out businesses than ever before. Business owners seeking the best way to leave their business intact and in safe hands, without a tortured exit strategy, are seeking management teams to achieve their aims – but there are two distinct types of management business purchase, each of which have their own impact. They are the management buy-out, and the management buy-in.
What is a Management Buy-Out (MBO)?
A management buyout, or MBO, is a form of business sale, wherein a company’s existing management team collaborate to purchase the company from its owner. The extent to which they purchase the business differs between individual sales, but the transaction overall is a lucrative way for business owners to sell their business while leaving it in good hands.
Given the existing relationship between business owner and management team, an MBO can also be a positive way for a retiring owner to remain involved in their business, either as a minority stakeholder or simply a board advisor.
What is a Management Buy-In (MBI)?
A management buy-in (MBI), meanwhile, is a form of business transaction where a management team external to the company raises the funds necessary to put in a tender for the business. In an MBI, a third-party management team may take an interest in owning the company in question, and seek external investment to take over the business’ operations.
What are the Key Differences?
Transactionally speaking, MBOs and MBIs are functionally similar. Both involve a pre-existing management team buying out a business, and taking over its assets and operations in the process. Both do this through additional lending and private investment, and an equivalent legal process involving the construction of a holding company to manage investment.
The key difference between an MBI and an MBO is the nature of the management team performing the takeover. MBOs see a management team within the company, with unrivalled experience of its day-to-day operation and a closer relationship to the business’ owner, take on the business as a whole. This is often seen as a less risky form of business sale, in comparison to MBIs. MBIs centre an external management company with less experience with the particular business, and less of a relationship with its owner.
MBOs, MBIs and Risk
Any form of transaction in which a management team buys a business is high risk. This is because even executive managers have little experience in business ownership, and little by the way of personal funds to back up a purchase.
However, owing to the lower relative risk level of an MBO, lending opportunities are lower risk and in higher abundance; MBO teams can collectively justify their intentions to a banking institution and secure a business loan. MBIs are higher risk, meanwhile, as a result of their minimal relationship with the owner on top of their minimal ownership experience. As such, private equity investment is much more commonly used to facilitate an MBI.
