M&A Stories – MBO on behalf of management

Capitalmind Investec is one of the market leaders in Management Buy Outs (MBO), having advised on numerous buyout transactions over the years.

One of the situations we advise on is assisting management teams to (partly) buy the company they are working for from their employer. This could be in connection with the succession planning of an owner at a family-owned business, or related to the divestment of a non-core business unit of a large company.

One needs to realize that the owner always has more options, as the owner can also sell the company to a strategic/market party without involving management (as a buyer) in the transaction. Therefore, the MBO on behalf of management is always a sensitive process. On the one hand, management needs to keep fulfilling its normal business role, while on the other it is planning to become an owner of the company. Management typically has a conflict of interest in such a situation, but also a rather strong position, as people and management are essential to the success of any company. Transparency is then key, including quickly assessing whether and how the MBO can be financed.

The financing of an MBO is paramount where management does not have enough capital to buy the company. Therefore, a (Private Equity) investor usually teams up with management to largely finance the transaction as a sponsor, incentivising management to jointly own the company. The idea is to jointly grow and fine tune the company, achieving higher returns while maintaining the characteristics of the company that led to its past success. These days a ‘sponsorless MBO’ is trendy as well, where the MBO transaction is financed by one or more (international) banks, debt funds and/or mezzanine funds without involving a PE firm. The advantage for management being that they will be able to own the company in full, or at least for a (more) significant part.

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