It’s not uncommon for a firm’s management or ownership to change during its life as a natural part of the company’s growth and development. Two of the ways this can happen is through a management buy-in (MBI) or a management buyout (MBO).
A management buy-in, or MBI, refers to the process in which an external party purchases a significant share or the entire company from its current owners. In many cases, this will mean replacing the existing management team with one of their own. On the other hand, a management buyout is a corporate finance transaction in which the existing management team acquires part or full ownership of the company.
Differences between an management buy-in and a management buyout
While a MBI and a MBO are sound strategies for acquiring an interest in a company, both differ in their approach and in the benefits to be gained. So, if you’re considering either, then it’s prudent to secure the services of a corporate lawyer firm, such as the team at JPP Law.
MBI
In the case of an MBI, since the team is buying a controlling stake in the company, the benefits can include bringing in a new perspective or expertise, as well as the possibility of additional funding for the purpose of opening up new markets, or sourcing new technologies that can help the company in its objectives.
MBO
In a management buyout, the existing management team gains greater control through the partial or complete acquisition of the company. This can bring with it added motivation and commitment, as the success of the company, and ultimately what the new owners gain, will depend on the success of the business.
Management buy-in vs management buyout – which is better?
In terms of which is more favourable, this will depend on the circumstances of the company, the owners and the experience and objectives of the team making the acquisition.
As mentioned, with a MBI, a new management team coming in can bring with it funding and new expertise. On the downside, a management buy-in can mean extensive due diligence before the deal can be finalised. This may result in the disclosure of sensitive information to a third party – another reason to choose an experienced corporate solicitor.
With a MBO, the existing management team already has a good knowledge of the business operations, particularly in regards to its strengths and weaknesses – and where the business should go next. The transition of power should, therefore, be quite straightforward and seamless. For this reason, it is often seen as a form of succession, especially if the owners are looking to retirement. On the downside, typically, no new expertise, or funding, is brought to the business. This can be a distinct disadvantage, as in many cases, a MBO results in a need to acquire additional funding from a bank or private equity house, which can eat into profits, and squeeze margins.
Finally, it should be pointed out that an additional option exists in the form of a buy-in management buyout, often known as a BIMBO. This occurs when a company is purchased by a combination of the existing management team and an external party, which are typically added to the management team after the transaction takes place.
All forms of management or ownership changes require the services of a professional corporate legal team in order for the arrangement to be legally-binding. For the best advice and outcome, contact the highly experienced team at JPP Law for your free 15-minute consultation call.
