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A management buyout (MBO) is a transaction in which a company’s existing management team acquires a significant or controlling stake in the business. This typically occurs when the current owners decide to sell the company or when the management team sees an opportunity to drive the business forward under their ownership. MBOs are distinct from other types of buyouts, such as management buy-ins (MBIs), where an external management team acquires the business.
Management teams pursue MBOs for various reasons, including a belief in the company’s long-term potential, the desire for greater autonomy, and the opportunity to be able to benefit directly from the business’s future success. MBOs are common in subsidiaries of larger corporations and private companies looking for a succession plan.
MBOs occur for several reasons, including:
Enroll in Moonfare’s free Private Equity Starter Course. In six emails, you’ll learn the essentials of the asset class and how it could transform your portfolio.
Enroll in Moonfare’s free Private Equity Starter Course. In six emails, you’ll learn the essentials of the asset class and how it could transform your portfolio.
Enroll in Moonfare’s free Private Equity Starter Course. In six emails, you’ll learn the essentials of the asset class and how it could transform your portfolio.
Key steps in an MBO:
MBOs are funded through multiple sources, including:
In 2006, HCA Inc, the largest US hospital operator, was taken private in a landmark $32.9 billion management buyout, the largest on record, according to LSEG data. The acquisition was led by a consortium including HCA's founder, Dr. Thomas Frist Jr, and private equity firms Kohlberg Kravis Roberts & Co, Bain Capital and Merrill Lynch Global Private Equity. The transaction allowed HCA to restructure away from public market pressures, before returning with an IPO five years later.¹
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MBOs are in fact a subset of LBOs (leveraged buyout), which simply refers to acquisitions made using borrowed capital (debt). MBOs also typically involve debt financing and private equity sponsors. The key distinction is that the management team, led by the CEO of the company, takes an active and leading role in the deal and has significant equity participation, or “skin in the game”. MBOs are typically motivated by management teams believing they can drive greater success and value without the constraints of current ownership.
While both MBOs and MBIs involve a change in ownership, the key distinction lies in who takes control. In an MBO, the existing management team leads the acquisition, which may help with ensuring continuity and stability. In contrast, an MBI occurs when an external management team acquires the business, often backed by private equity, and replaces the existing leadership. MBOs are typically driven by a management team’s confidence in their ability to maximise the company's potential, whereas MBIs are often initiated when investors believe fresh leadership is needed to improve performance or steer a strategic pivot.
A management buyout can be an effective strategy for transitioning ownership while maintaining business continuity. It offers management greater control and financial benefits, but it also comes with challenges such as securing financing and managing transition risks. When structured correctly, an MBO can drive long-term growth and stability for both the business and its leadership team.
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¹ https://www.reuters.com/markets/deals/seven-is-reported-offer-biggest-management-buyouts-date-2024-11-13/
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