The investment field of private equity extends over different company phases. The early-stage financing is referred to as venture capital, which is accordingly a sub-form of the PE. Other corporate phases in which private equity funds invest are the growth phase but also the crisis. An investment in a company that is in a corporate crisis is usually referred to as the so-called turnaround, in which a distressed company is to be put back on a solid financial footing. However, there are also some private equity companies that specialize in liquidation and generate their added value from it. Private equity also includes other strategies such as the management buyout (MBO).
The management of a company usually does not belong to the group of shareholders. However, this can change through a management buyout (MBO). In an MBO, one or more private equity investors support the management of a usually well-running company with the aim of taking over the company. These buyouts often occur in combination with other forms of divestment. Since the management usually does not have all the necessary capital, private equity investors are also brought on board. A complete disinvestment with only the participation of management is extremely rare. An MBO is an option for mostly small and medium-sized enterprises that are to be sold.
A distinction is made between different types of MBO. In a leveraged management buy-out, the money for the purchase comes mainly from third parties (borrowed capital), and the equity portion is small. Another form of company takeover by management is the management buy-in (MBI). Here a company is taken over by an external management or the takeover is pushed by an external management with the help of an investor. If all or a large part of the workforce takes over the company shares, this is known as an employee buy-out.
Selling to your own executives has several advantages:
Both sides know each other well, trust each other personally,
and technical and sensitive information does not leave the company.
For the seller, an MBO has the great advantage that with this form of sale the business is acquired by a familiar person. In most cases, there is a strong relationship of trust between the owner of a company and the manager. The relationship of trust between the seller and the manager also has two transaction-relevant advantages: On the one hand, the examination of the company to be taken over (due diligence) when it is acquired by its own management is much smaller due to its intimate knowledge of certain details. This leads to an MBO process that requires much less time than a sale to an external third party.
On the other hand, the seller does not have to hand over confidential company details to third parties if he continues with his own management. The disclosure of company information to unknown third parties is a major obstacle for many sellers when making a sale. This can significantly reduce the risk and costs of the transaction.
For the management taking over, an MBO is a unique opportunity to take the leap into independence. Compared to a new company, an MBO has the great advantage that the managers set up their business on the basis of a functioning business idea. This gives them a much higher security of being successful compared to the risk of founding a start-up.
And last but not least, an MBO also brings advantages for the workforce, customers and suppliers of the company. The transfer to the existing management generally guarantees the continuity of the business. Employees can often assume that they will be able to keep their job. Customers and suppliers can trust that they will continue to do business with the company on the usual terms.
A disadvantage of a management buyout strategy can be that the existing management lacks the entrepreneurial spirit necessary for this kind of endeavor. The managers may well have the skills to run the day-to-day business of the company properly and successfully. However, the role of the owner requires additional visionary and strategic skills that not every manager brings with them on their own.
Another disadvantage of an MBO can be that with most management buy-outs there is a change in the capital structure or an increase in the dependency on capital providers. In order to enable a management buy-out from a financial point of view, large sums of capital must be borrowed from banks. This leads to limited financial freedom of action and can quickly turn into a serious disadvantage, especially if the company does not have a stable and large free cash flow.
Capital is required to take over a company in any case. As a rule, an MBO is only financed to a fraction of the private assets of the previous management; a large part of the financing is provided by banks or private equity companies. Even though this may carry some risks in certain divestment scenarios, working with a private equity firm can create great opportunities nevertheless. The biggest advantages of financing through a private equity firm are their extensive network and industry know-how that is invaluable and can ultimately mitigate any risks.
In order to avoid any pitfalls in the MBA process and create a successful strategy, it is crucial to have an experienced team of consultants on your side. We have successfully accompanied numerous divestments and management buy-outs, specifically within the semiconductor and the electronic manufacturing industry. We would be happy to support you with your personalized acquisition strategy. Contact us at anna.effa@fabexchange.com.
