Management Buyouts (MBOs): Everything you Need to Know - Private Equity | Mink Learning

[Music] in this video we will talk about management buyouts also known as mbos we will answer the questions what are management buyouts why do management buyouts occur and how are management buyouts financed now before we get started if you enjoy this content and would like to see more please make sure to click the like and subscribe buttons and click the link in the description below for a one-page summary of this video so let's get started by answering the question what are management buyouts management buyouts or mbos are when the management of the organization the people running the business buy out a portion or all of the shares of the company when the management buys out the company the management will own more of that company that's it so now that you know what management buyouts are let's take a look at why do management buyouts occur in a previous video we did on exit options we talked about the following exit options for a business selling to a strategic buyer selling to a private equity firm bringing a company public through an initial public offering an ipo a partial exit through a dividend recapitalization which one could argue is not really an exit strategy and selling to management through a management buyout an mbo now the owner of a company may want to sell or exit their ownership for many reasons the owner may want to retire or transition out of the business for some other reason there are many advantages to both the owner and the management team the people running the business to conduct a management buyout instead of selling the firm through one of the other exit options mentioned earlier for the owners some advantages of mbos include that the information is kept confidential there are minimal transition issues for your clients and employees and there is an overall lower risk since the business will not have a change in management for the management team some advantages of mbos include that the management team gets to bet on themselves have a higher potential return and invest in a business they understand and believe in now one may argue that since the management team uses the majority of their personal net worth to invest in the business that the management team's net worth is not properly diversified while i would agree that technically the management team's net worth may not be diversified my personal opinion is that from the perspective of the management team there is no better company to risk your capital on then your own company now this moves us to our next point on which we answer the question how are management buyouts financed management buyouts are usually financed through three methods management equity debt and private equity firms or other investors let's go over each one starting with management equity if the management team has the capital to buy out the business without involving external parties then the management team can just use their own equity to buy out the firm that being said in many cases since the management team has probably worked in the firm for many years there is a good chance the management team will not have the required capital to buy out the firm so let's move on to our second method which is debt a management team may be able to finance a buyout by borrowing the money this may enable the management team to own a significant amount of the equity in the business one option is for the management team to borrow directly from the owner the seller to finance the acquisition in some companies the owner may give a below market interest rate to the management team when giving this loan another option is for the management team to take on bank debt now when a bank looks to loan a business money whether it's for a management buyout or not a bank will focus on two main parts of the business the assets in other words the bank is looking at asset-based lending and the cash flow in other words the bank is looking at cash flow lending for asset-based lending the bank will lend money based on the collateral that the business can provide to the bank examples of assets used for loans are real estate and company equipment for cash flow based lending the bank will lend money based on the cash flow produced by the business most of the time ebitda is used as a proxy for cash flow as we've covered in previous videos ebitda stands for earnings before interest taxes depreciation and amortization a bank will determine the loan amount as a multiple on ebitda for example the bank will give the business a loan that might be three times four times or five times ebitda the multiple will be based on comparable figures as well as the stability and growth of the cash flows as well as other factors such as the company's industry and overall economy now before we move on from the dead topic i'd like to mention that there has been an emergence of private debt firms that have been offering debt on management buyouts and buyouts in general to learn more about this check out our videos on private debt and leverage loans now let's move on to the third source of capital for a management buyout and that is private equity firms or other investors if a management team is able to obtain debt to buy out a business the debt may not be enough to cover the purchase amount so the management team may need additional equity many private equity firms will be happy to offer the equity amount for management teams looking to buy out their business by helping management teams finance the acquisition of the business the private equity firm will not only get a stake in a business with a management team that is engaged but also get a stake in a business that has a management team with skin in the game in other words the management team will have their own equity at risk thereby aligning their interests with the interests of the private equity firm now here's a final thought investors when you buy a company it is extremely important that the management team running the business has skin in the game when a management team's personal net worth is concentrated in the business that you own well this will create a strong alignment of interest between you and the management team and as you know from our previous videos alignment of interest is one of the most important factors for a successful private equity investment in this video we talked about management buyouts also known as mbos we answered the questions what are management buyouts why do management buyouts occur and how are management buyouts financed if you have any comments or questions on management buyouts or buyouts in general please leave them in the comments below thanks for watching our video if you enjoyed it please click the like and subscribe buttons and in the description below you'll find links to a free one-page resource our website and our linkedin page where you can find more information on this topic and other private equity topics thanks and we'll see you in our next video you

Channel: Mink Learning with Steve Balaban, CFA

Views: 10,332

Keywords: Private Equity, Mink Learning, Steve Balaban, Management buyout, investment, Exit options

Id: ofFo1Aj25Zg

Length: 9min 54sec (594 seconds)

Published: Tue Jul 06 2021