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A2 Objectives and Strategy – Unit 6. Management buyouts (MBO). Management buyouts. The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it. Methods of finance for buyouts. Managers personal funds Bank loans

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management buyouts
Management buyouts
  • The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it.
methods of finance for buyouts
Methods of finance for buyouts
  • Managers personal funds
  • Bank loans
  • Investment funds obtained by selling shares to employees
  • The most common is, venture capitalists or private equity firms lend the MBO by taking a stake in the business for a return of about 25-30% over 3-5 years
reasons for buyouts
Reasons for buyouts
  • Large businesses may sell off a small section to raise cash, refocus, or get rid of an unprofitable activity. Management may feel this activity could be run profitably in a different way or more finance
  • Family owned companies may prefer to sell to the existing management hope of maintaining employment and consistency
  • Firm may be in hands of receivers and selling part of business to managers will raise finance to pay creditors
slide5

Reason sold

Finance

Information sourced from http://www.chorion.co.uk www.bbc.co.uk

slide6

Finance

Reason for sale

Information sourced from www.bbc.co.uk and www.peacocks.co.uk

rewards of buyouts
Rewards of buyouts
  • Management and employees have more motivation and responsibility
  • No owner manager conflict so objectives may be clearer
  • Less bureaucracy as no head office so no hindering progress
  • Profits will not be diverted to another part of the organisation
  • If successful the company may be floated on stock market or selling shares in a takeover offer
risks of buyouts
Risks of buyouts
  • Personal losses for new owners if unsuccessful
  • Original owners may have been right to sell if unprofitable. Why will it change?
  • Little access to capital?
  • Considerable rationalisation and job losses may follow, therefore adverse morale
are buyouts a good thing
Are buyouts a good thing?
  • 314 MBOs completed in the first half of 2004 – 12 a week – total value of £7.6 billion
  • Some say if managers see value in the firm they should deliver it to the shareholders
  • Workers may be more at risk than if owned by a larger firm
  • Jobs may not have existed if there had been no MBO
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