Management Buy Outs (MBO’s) – The Simple Definition of an MBO

For those who do not know what management buy outs are, the definition is really quite simple: it is when the management of a company buys out a majority of or all of their company. This type of acquisition is more common than you would think. The truth is that it is just like other types of company acquisitions, it is just that instead of the buyers being outsiders, the buyers are those who work for company management. This can actually only work of the company is a privately held company – which it usually is to start with, but if it is not, then the company goes from being publicly held to being privately held in order to continue with the MBO.

Some people feel that management buy outs are unfair to the owners of companies because of the information that the managers gain during their time working for the company. These same people feel that this can help contribute to stock manipulation where the stock prices are unduly increased to make it seem that they are worth more than they actually are. In some respects that could be true, but more than likely it is not true in all cases.

You may be wondering why managers would want to buy out their companies. Again, it is quite simple: to ensure that they will continue to have jobs. The way the economy is going, financial and business executives do not truly know from one day to the next if their company is going to end up letting them go. However, if they do management buy outs, they will know for sure that they have a job. MBO’s also allow the managers to reap more of the profits that they earn the company instead of only getting a small return on all of the time and energy they invest into their work. It is easy to see the appeal of MBO’s in this respect.

There are different ways in which management buy outs can be financed. They can financed through seller financing where the owner of the company extends the loan for them to buy it out, debt financing where the management goes to a bank and gets a loan, or private equity financing which is where the management will go to private investors in order to fund the MBO when they can’t get a bank loan. Whatever way the MBO is financed, the management has to be confident that they can pay the loan funds back. Otherwise, they will end up losing their jobs in the end anyway.

About Richard Wilson