Advantages of a Management Buyout (MBO)
Advantages of a Management Buyout (MBO) An advantage of an MBO is the simplified transaction process, as there is no need to identify an external buyer. The management team is already familiar with the business and has a strong understanding of its operations, particularly its strengths and weaknesses. In addition, the exiting shareholders are likely to already trust the management team. This increases confidence that their expertise will be used to grow and improve the business. Additionally, as an internal acquisition, the process is less likely to cause complications or disruptions, with responsibility being transferred smoothly within the existing management structure.
Another advantage is that the confidentiality of the acquisition can be maintained. Since it is an internal acquisition, sensitive information about clients, staff, and other business operations can be kept secure, with minimal risk of leakage. The continuity of existing operations also helps to protect confidential data and transition customers seamlessly.
Disadvantages of a Management Buyout (MBO)
A disadvantage of an MBO is that the management team may struggle to finance the buyout, especially if they lack significant personal funding. This often results in lower cash realisation for vendors on day one, with deferred consideration or vendor loans commonly used to spread the payment across years and assist with cashflows.
This increase in borrowing (both bank debt and vendor financing) can put a strain on the business as cash generation is used to service debt rather than reinvest for future growth.
