The Two Types of Buyout: Management and Leveraged

If you’re looking to sell a company, then by definition, you’ll need to go through a buyout process. There are many different kinds of these, and the makeup and nature of your business will have a big say in determining which is appropriate for you.

If the company’s management acquires the stake in the company, then a Management Buyout, or MBO, has transpired. This is among the more common forms of the buyout. A buyout can be ‘leveraged’ if it’s primarily funded by debt. 

Let’s take a closer look at these terms and the advantages and drawbacks of each approach.

A Management Buyout

A management buyout occurs when the company’s existing managers obtain a controlling stake in the company. It typically comes about because the management believes that they can earn more if they’re the owners of the company rather than its mere employees.

A Leveraged Buyout

This is the debt-fuelled buyout. Typically, the company’s assets will be used as collateral against the debt when it goes through. So, if the buyer should ultimately default, the company’s assets will be given over to the lender. Through this form of a buyout, the purchase of very large companies can be enabled, even if the funding isn’t available right away.

Advantages of these Buyouts

So, what’s the appeal of a buyout?

First, a rival business might seek to eliminate competitors by simply buying them out. This is an effective way to shore up a position of dominance in an established market. A buyout might also lead to efficiency savings and a reduction in operating expenses, which will drive up profits. The company being bought might also have intellectual properties and markets that the purchaser wants – and in this sense, the buyout of the company is simply a means to that end.

Disadvantages of these Buyouts

Not all buyouts produce the desired result. In many cases, there can be unforeseen consequences. 

The most obviously dangerous is the possibility that debt will spiral away. The company may be forced to make staffing cuts to deal with the debt. Certain persons might disagree with the decision to sell and choose the transition period as an excellent time to move on, or retire. The buyer might also have trouble integrating the company into any other companies they hold, especially if a merger has been poorly thought through.