# Understanding Management Buyouts (MBO): Definition, Benefits, and Example

## What Is a Management Buyout (MBO)?

 A management buyout (MBO) is a strategic transaction where a company's management team acquires all of the business's assets and operations. Often used to gain more control and financial rewards, MBOs also involve significant borrowing, making them a form of a [leveraged buyout](https://www.investopedia.com/terms/l/leveragedbuyout.asp). This comprehensive guide explores the reasons companies pursue MBOs, their financial implications, and offers a notable example with Dell.  

### Key Takeaways

*   A management buyout (MBO) involves a company's management team purchasing the assets and operations of the business they manage.  
    
*   MBOs are often financed through a combination of debt, equity, and personal resources, and are considered a type of leveraged buyout (LBO).  
    
*   The main motivations for an MBO include gaining control of the company, financial gain, and leveraging the management's expertise.  
    
*   While MBOs offer potential rewards, they also carry the risks of transitioning from employees to owners and potential conflicts of interest.  
    
*   An MBO differs from a management buy-in (MBI), where an external team acquires a company and replaces the existing management.

![Management Buyout](https://www.investopedia.com/thmb/YFvp1We6pvYRQA6PNruTW4gO8Ho=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/mbo.asp-final-ea3c2260831144cdb06541652cc48358.png)

*— Investopedia / Theresa Chiechi*

## Understanding the Mechanics of Management Buyouts

As noted above, management buyouts occur when a corporate manager or team acquires the business they manage from the owner(s). The business is purchased from a private owner and/or any shareholders in the company. The acquisition includes everything associated with the business, including the assets and liabilities. MBOs often take place because the management feels they are better equipped to help the company grow and succeed financially. These transactions are key [exit strategies](https://www.investopedia.com/terms/e/exitstrategy.asp) for:

*   Large corporations that want to sell off unprofitable assets or those that no longer make sense
*   Private businesses where the owners wish to retire

The [financing](https://www.investopedia.com/terms/f/financing.asp) required for an MBO is often quite substantial and is usually a combination of debt and equity that is derived from the buyers, financiers, and sometimes the seller. Since it uses a significant amount of borrowed capital, it is considered an LBO. As such, it may also be called a leveraged management buyout.

After an MBO, management enjoys ownership rewards but faces more responsibility and risk.  

## Why Companies Pursue Management Buyouts

Management buyouts are risky because they might not succeed. Why undertake an MBO? Here are some reasons management might consider it.

*   Gaining control. Members of management may not agree with the direction of the company. By executing an MBO, they may feel as though they have more control of the business, its success, and its future.
*   Financial gain. Members of the management team may not feel as though they aren't getting the full financial benefit just by managing the company. By acquiring the company, they can reap the benefits.
*   They have the expertise. Management may feel as though the owner(s) doesn't have the knowledge or ability to lead the company. Corporate management may have the educational or work experience to help them guide the company to new heights and they may feel that the only way to do that is through an MBO.

## Planning a Successful Management Buyout Strategy

A successful MBO needs careful planning, so it shouldn't be rushed. Here are key factors to consider.

### Considerations Before the MBO

All financial [transactions](https://www.investopedia.com/terms/t/transaction.asp) need thorough research. Management should create a complete plan or proposal. Some points to add include:

*   The members of the management team involved in the MBO
*   The reasons for the buyout
*   The intentions and goals after completion
*   The terms of the deal, including the purchase price
*   The way the buyout will be financed

It's always a good idea for management to show the company's owner(s) that they've done their homework. This includes carrying out a thorough valuation analysis and to carry out full due diligence. Even though the managers currently work at the company, there may be hidden problems, like outstanding litigation, that they don't know about.

### Financing

An MBO requires significant funding due to its size. Management can turn to several sources to secure capital for the deal:

*   **Debt:** Management normally turns to banks and other lenders to secure financing. Banks tend to consider MBOs to be fairly [risky](https://www.investopedia.com/terms/r/risk.asp) ventures, so they may not fund part or all of management's requests. This means the buyers may have to look for primary funding elsewhere before they turn to a lender to cover any shortfalls.
*   **Private Equity:** [Private equity](https://www.investopedia.com/terms/p/privateequity.asp) firms are usually receptive to finance MBOs if banks refuse. One thing to keep in mind is that these firms often expect to get a share of the company even though they're loaning the money to management.
*   **Other Types:** There are some other types of financing that are used by management, including owner financing, which is funded directly through the seller who is repaid, or [mezzanine financing](https://www.investopedia.com/terms/m/mezzaninefinancing.asp), which involves a combination of debt and equity.
*   **Personal financing**: Managers may use their own personal finances, such as savings to buy the company. This is usually the case where management are personally very wealthy, or have access to capital.

> **Important**
>
> Management should do their due diligence while considering an MBO. This includes a full evaluation of the company and its financial and legal framework.

## Pros and Cons of Undertaking a Management Buyout

### Advantages

[Hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) and large financiers see MBOs as good investments, as they promote going private to streamline operations and increase profits. They are encouraged to go public at a much higher [valuation](https://www.investopedia.com/terms/v/valuation.asp) down the road.

A private equity fund that supports an MBO will likely pay an attractive price for the asset, provided there is a dedicated management team in place.

### Disadvantages

There are several drawbacks to the MBO structure as well. While the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial. Not all managers may be successful in making this transition.

In an MBO, the seller might not get the best price for the asset. The managers have a potential conflict of interest if the existing management team is serious about bidding on the assets or operations being [divested](https://www.investopedia.com/terms/d/divestment.asp), Put simply, they could downplay or deliberately sabotage the future prospects of the assets that are for sale to buy them at a relatively low price.

Pros

*   Good investment opportunity for management and private equity/hedge funds
    
*   Private equity funds may pay a good price depending on the circumstances
    

Cons

*   Transition for owners and employees may be tough
    
*   Can result in a conflict of interest
    

## Comparing Management Buyouts and Buy-ins

The opposite of an MBO is a management buy-in (MBI). An MBO involves internal management buying the company, while an MBI occurs when an external team [acquires](https://www.investopedia.com/terms/a/acquisition.asp) and replaces current management.

An MBO’s advantage over an MBI is that as the existing managers are acquiring the business, they have a much better understanding of it and there is no learning curve involved, which would be the case if it were being run by a new set of managers. MBOs are conducted by management teams that want to get the financial reward for the future development of the company more directly than they would do only as employees.  

> **Fast Fact**
>
> While private equity funds may participate in MBOs, their preference may be for MBIs, where the companies are run by managers they know rather than the incumbent management team.

## Example of an MBO

One prime example of a management buyout involves the computer and technology company, Dell. In 2013, founder Michael Dell and a private equity firm (Silver Lake Partners) paid shareholders $25 billion as part of a management buyout. Dell took the company private, so he could exert more control over the direction of the company. The company went public again in December 2018. Shares trade on the [New York Stock Exchange](https://www.investopedia.com/terms/n/nyse.asp) (NYSE) under the ticker symbol [DELL](https://www.tradingview.com/symbols/NYSE-DELL/).  

## How Do Management Buyouts Work?

[Management buyouts](https://www.investopedia.com/terms/b/buyinmanagementbuyout.asp) work when one or more members of a company's management team want to buy the operations from the owner(s). The goal is to take the company private to help it grow and succeed. These buyouts are typically funded with one or more types of financing, including debt and equity.

## What Is an Example of a Management Buyout?

In 2013, Michael Dell partnered with a private equity firm to purchase the computer/technology company he founded from shareholders. He took Dell private before the company went public again in 2018.

## How Do You Finance a Management Buyout?

There are a number of ways to finance a managed buyout. Debt financing involves going to banks and other lenders for loans. But banks may not consider financing these types of deals because of the amount of risk involved. Private equity firms, though, are more receptive to loaning money to management. Some companies may require a share in the company in addition to being repaid. Buyers can also approach owners/sellers for loans or use a combination of debt and equity to pay for the acquisition.

## The Bottom Line

Management buyouts (MBOs) are significant financial transactions where a company's management team acquires the business they operate. These transactions, often funded through a combination of debt and equity, allow management to gain full control and potentially enhance the company's growth and profitability. MBOs are not limited to large corporations but are also prevalent among small businesses, particularly as a succession strategy.

Although they offer management the opportunity for financial gain and control, MBOs come with risks and require thorough planning and due diligence. Understanding the motivations and challenges of MBOs can help professionals make informed decisions when considering such buyouts.

> **Article Sources**
>
> 1.  Dell Technologies. "[How we got here](https://www.dell.com/en-us/dt/corporate/about-us/who-we-are/timeline.htm)."
>     
> 2.  Dell Technologies. "[Stock Information](https://investors.delltechnologies.com/stock-information/stock-quote)."