Management Buy Out (MBO): Definition & Procedure for the Acquisition of a Company

Especially ?grown? family businesses are more often sold to the existing management. Family businesses in particular are often sold to the existing management due to a lack of suitable or willing successors from within the family. In this way, the FThe continuity of the company as well as the continuity of the ensured in the management of the company.

Find out here whether the management buy-out can also be a sensible option for you.

You don't have much time to read? The most important facts about MBOs in company acquisitions at a glance:

In a management buy-out, a company is handed over to the existing management. Depending on the case of application, it is also a "Leveraged MBO" (debt financing), "Going private MBO" (public limited companies), "Employee MBO" (takeovers by employees) or "Institutional MBO" (takeovers by legal entities). The procedure is similar to the general M&A process, but has a few special features in the details.

Management Buy Out Definition: MBO explained simply

The MBO (Management Buy Out) is understood to be the Transfer of the company to employees (one or more) of the same. Experience shows that this mainly means selling to the existing management. The MBO plays an important role in business successions in Small and medium-sized enterprises (SMEs with up to 250 employees).

Difference Management Buy In Buy Out

In the case of a management buy-in (MBI), the acquiring employees and future entrepreneurs do not come from the acquired company. A external management takes the helm and is often financially supported by an investor. In smaller companies, it is the typical individual who buys a business from outside as part of a succession solution.

In fact, even the combination of buy out and buy in exists: Buy In Management Buy Out? (BIMBO for short). Here, the new management is formed from both existing staff and external people.

Management Buy Out Types

All MBO types share the basis that the company is taken over by existing employees, mostly from the management. In addition, however, further subtypes are distinguished that have certain characteristics.

Leveraged Management Buy Out

The leveraged management buy-out is characterised by a high proportion of debt capital. This leverage effect also gives rise to the name ? This leverage also gives rise to the name "leveraged". In German-speaking countries, this is referred to as a leveraged takeover. This is relatively common among SMEs.

Going private MBO

This special form of management buy-out is also called a privatisation MBO and occurs when there is a listed corporation acts. The company shares are in the hands of the (mostly) public investors before the MBO and then return to the private ownership of the new management.

Employee Buy Out

The employee buy-out is characterised by the fact that the company shares are acquired by the Mass of the workforce be adopted. While it is not necessary for the entire workforce to become active, a significant proportion of them should be involved.

Institutional Buy Out

We speak of an institutional buy-out when the majority shareholder, after the Acquisition of an institutional investor is. Institutional investors are legal entities, for example also banks, insurance companies or other companies.

Management Buy Out Procedure

The basis for the procedure of a management buy-out is the general M&A process. In an advanced stage, a Business valuation carried out and negotiations follow. A Due Diligence should be just as much a part as the Letter of Intent.

In an MBO takeover, an important step is added to the M&A process in the first place. The takeover candidate should have its Check suitability for the task ahead and assess it honestly. Taking over a company is ultimately a big task that requires certain competencies.

For the personal potential analysis, a qualified online assessment helps, e.g. "MY-ENTREPRENEUR-CHECK". In this reflection tool for entrepreneurship, the MBO and its project are also discussed in depth in a personal analysis interview.

Management Buy Out Example

A management buy-out (MBO) often seems plausible and could be implemented much more frequently in SMEs. The takeover of a company by a senior employee is an obvious way for owner-managed companies to deal with the succession issue when their own family members are not an option. Nevertheless, the management buy-out (MBO) is by no means as widespread among smaller SMEs as one might think. This is also confirmed by Statements by banks, savings banks and chambers in the Rhine-Main region. According to this, a broad spectrum of financing is available for MBOs, which is used far too rarely. Yet there are many reasons why an MBO is an ideal Company succession speak.

A well-known example from practice is the takeover of the Impulse magazine by the previous editor-in-chief Dr Nikolaus Förster. The major publisher Gruner + Jahr Deutschland GmbH handed over the company to Förster via MBO in 2013. In the meantime, the magazine has undergone a major transformation and is successfully established in a niche market.

Management Buy Out Advantages and Disadvantages

From the point of view of the transferor, the advantage is that he has known his successor for many years, knows about his strengths and there is a basis of trust. The management of the company is Familiar with the structures of the company. This binding of the acting persons often facilitates the sales negotiations.

It is not the family connection that counts, but the talent of the employee. The possibly somewhat more moderate purchase price is countered by the desired continuity with the company, customers and employees.

The successor from within the company, provided he fundamentally enjoys an entrepreneurial role, already knows his company and avoids an elaborate, often frustrating search outside the company. When acquiring Significantly lower risks than when taking over an unknown company or even founding a new one. And the elaborate DD (buyer screening) can often be implemented leanly and quickly.

Nevertheless, there can be problems in financing the purchase price, as potential buyers usually have a high need for external financing and there is not always sufficient private equity available. Seller loans can help, for example, or the purchase of shares can be done "step by step".

Management buy-out risks

Experience shows that passion, commitment, professional competence, authenticity and a certain willingness to take risks on the part of the previous management are decisive for the success of an MBO. Because from the Persuasiveness and the strategy developed it depends on whether the financing of an MBO and the search for backers can be successfully implemented.

This is one of the biggest challenges of management buy-outs. The basic prerequisite for a successful MBO is sufficient financial resources for the company and stable corporate development.

Structuring and taxes

In any variant of an MBO, the tax aspects should always be addressed. Important is a comprehensible and auditable purchase price: The tax office checks, for example, whether the shares acquired by the new managers correspond to the market value. If this is not the case, there is a discounted price and, according to the possible assessment of the tax authorities, it is a non-cash benefit that must be taxed.

In another special case, the Gift tax become relevant: Namely, when the new managers are family members. This is not infrequently the case with small and medium-sized enterprises. This is where the tax office takes a close look. In the event of disputes with the tax authorities, it is worth investing in a qualified expert opinion according to the IDWS1 capitalised earnings value method. This has a very high recognition rate.

Fortunately, there is some leeway in tax planning. It is possible to legally reduce the tax burden through a clever approach. For this purpose, expert advice is highly recommended.

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Further tax aspects are to be considered when subdividing the acquisition into Share Deal and Asset Deal to note.

Asset Deal & Share Deal

In the case of a share deal, the Rights and obligations of the previous owner completely to the new buyer. In an asset deal, on the other hand, complete ownership is not transferred, but only individual areas. This also results in various aspects that must be taken into account for tax purposes.

We have dedicated a separate, detailed article to the share deal and the asset deal.

Management Buy Out Financing

In contrast to the classic Company saleIn a management buy-out, the previous management buys the shares in the company. Good advice is therefore needed to set up sustainable financing. The Need to raise additional equity This is due to the fact that the acquiring management usually does not have the necessary equity to fully finance the purchase price.

In order to close the financing gap, often the previous Shareholders of the company, banks, investment companies or family offices on. The interest rates for such equity-strengthening financing are often higher than for a normal bank loan. In the financing mix, such a component usually helps to obtain a classic bank loan.

Seller loan

Provided that the former shareholders are willing to take a high risk, the entrepreneurial loan is the simplest form of financing. The instalments for this usually flow from the company's earnings.

Caution! In many cases, the former shareholders allow themselves a significant say in this process, which can lead to conflicts in the future direction of the company.

If a bank finances the Difference between purchase price, managers' equity and entrepreneurial loan, this leads to fewer frictional losses in practice. In this constellation, however, a subordination of the entrepreneurial loan is demanded by a majority of banks.

Bank loan / borrowed capital

The financing bank secures the continuation of the business relationship. Unlike in the case of a sale to a competitor, the acquirer is likely to leave the banking relationship unchanged as a rule. If the purchase price is reasonable, acquisition financing should not be an insurmountable hurdle. Ultimately, it is also For the financing bank, an MBO is usually less risky than a takeover by an outsider..

Even if the MBO candidate's equity cover is thin and financing is tight, there are a number of funding options available from regional development institutions and KfW. Finally, in recent years, a fertile Environment of private investors, business angels and family offices of entrepreneurial families which increasingly support smaller MBOs with equity capital.

Private equity

Another viable source of financing is the raising of private equity capital. In this way, a company's equity capitalisation can be sustainably improved ? especially in the interest of creditworthiness. Private equity investors invest almost exclusively in unlisted companies and thus represent an important potential source of financing for the management buy-out.

In contrast to banks, the aim of such private equity investors, apart from the Interest on the capital, an active say and prepare a lucrative exit (resale) after only 5-6 years.

Closing

Once the handover is sealed, the handover process should not be neglected. Many new tasks await the new management. Also, the Establishing a leadership position with the staff be a hurdle. A positive signal is sent by the integration of the known employees after the takeover, combined with possible career opportunities; an 'entry party' is usually always well received. After all, the company has succeeded in securing jobs with its own employees.

In general, the handover should also be organised close to the previous leadership, if possible. This ensures a smooth transition.

Conclusion

Many entrepreneurs do not trust their employees to take on the role of entrepreneur ? often wrongly or even in ignorance of the actual opportunities. In contrast, MBO candidates often shy away from the risks and financing challenges.

In view of the The advantages of an MBO succession described above it helps to address any concerns at an early stage and in an informed manner and to lower the presumed hurdles and risks for interested successors from one's own company. The possibilities and instruments are available, they just have to be used.