Minimizing Risks in a Management Buy-Out Transaction

When a company has openly divulged that they are divesting a business unit there are different approaches a restructuring firm can take to provide the best possible outcome, one of them being a Management Buyout or MBO.  These types of plans can be used in large public companies moving away from a business unit, or a smaller private company whose owner is withdrawing.  In the case of a larger company, the parent company may want to move away from a specific business unit or process because it doesn’t fit with their current or future business model.  Despite wanting to eliminate the unit, there may still be a chance that the specific department is profitable.  In this scenario, an MBO can work out as mutually beneficial for the selling party, and for the upper management who want to take ownership and continue providing the goods or services.

For information on what an MBO is, or who can fund these projects, please refer to our past article here.

Key Considerations:

Types of Risks:

Upfront financial obligations

  • Purchasing a company by the management can be done without outside investment, but the group must have significant capital upfront that they are willing to put on the line.  This type of risk can be financially beneficial or a great financial risk for the team.

Managerial experience doesn’t always translate to business ownership

  • If the team undertaking the MBO doesn’t have C-level executives joining them, they may have to go to the market to find an adequate executive staff who sees the vision.

Lack of supporting staff

  • An individual business unit may not always be equipped with a support staff including: sales, purchasing, marketing, accounting, etc.  These processes might be managed by the parent company, meaning a new staff will have to be procured and trained before the business can begin to turn a profit.

Proof of profitability for Private Equity or outside investors

  • Because funding may not wholly come from the management staff, outside investors like a PE group may become involved to finance the operations.  This means either proving quick profitability in the short term, or a vision and business plan which will make the new company financially sound with minimal risk in the long term.

PE Investors may want a short turn around 

  • PE groups who will finance a new operation may look for a return on investment within 3-5 years
  • This has to be accounted for by the MBO party and reflected in a business model when shopping out the investment.

Equity or ownership of investor party

  • The management undertaking the MBO will have a business plan to turn a profit, but the investor group may install their own staff to ensure the best shot at capitalizing on their investment.  This can create an internal power struggle which leaves employees in the same position they were in before working under new management.

Ways to Limit These Risks:

Supply Agreements

  • Supply agreements, in the case of manufacturing, are a good way to limit cash burn while the new company gets established.  It may also be an added bonus to the selling party as they have a runway of production while they switch to contract manufacturing, or convert their processes to a new technology.

Advancing technologies

  • The management team taking ownership will know the ins and outs of the business they’ve been a part of.  No doubt they will also have visions for how the company could run more seamlessly, or different parallels they could branch into where the prior owner didn’t focus time and energy on.

Ensuring stability for the workforce

  • When a business unit is divested and closed, the staff may not have the opportunity to move to other locations or remain employed.  Undergoing an MBO may provide stability for the employees on both the long and short terms.

Reduced risk for the current owner in that confidential information isn’t open to established competitors

  • If the parent company is still operating, there may be comfort in knowing that any proprietary processes or IP won’t be going to a direct competitor.

Opportunities for a quicker transaction because the acquirer knows the transaction well.[1]

  • An advantage to an MBO is that those intending to purchase will have intimate knowledge of the company.  This way they can come to an assessment of the value and get through discovery and due diligence quicker than an outside party without that prior knowledge.

Things to Note:

Revealing interest in an MBO from a buyer side too early

  • MBO performance has been shown to peak in the year before an MBO, meaning there may be a form of earnings management or inflation prior to the sale, to make the business appear more profitable before undergoing the divesting process. [2]

The M&A experts at FabExchange are available to managers who are faced with this decision for a non-binding discussion. Please reach out to us at either 1-408-560-2900, or by email at


 [1] Jones, E. (2019, February). Advantages and Disadvantages of a Management Buyout. BTG Corporate Finance, Articles.

[2] Tutuncu, L. (2014, September). EMPIRICAL ESSAYS ON PERFORMANCE OF MANAGEMENT BUYOUTS. University of Birmingham Research Archive, e-theses repository. 

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