Management Buyout

A Management Buyout involves the purchase of all or part of a company by the existing management team, including assets and liabilities.

Often, this will be achieved with the help of external financing such as private equity, debt/lending or owner financing where the seller is repaid. Usually, the management team will take full ownership and control of the business with the former owner moving on or retiring. It appeals to professional managers as there is greater potential for reward and control as owners rather than employees, with the goals of helping the company to grow, streamline operations and improve profitability.

Management may have more expertise, knowledge and ability to lead the company than the owner. However, this move also means more responsibility and greater potential for loss.
The benefits to a Management Buyout are that they are considered to be good investment opportunities for hedge funds and large financiers as well as giving management greater control in running the business.

The drawbacks are that the transition for both the owner and the management team can be difficult with a change of mindset required as managers become owners, necessitating a more entrepreneurial view. Additionally, there could be a conflict of interest as managers could downplay or subvert information to buy at a lower price, thereby disadvantaging the seller owner.