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When Manager become entrepreneurs: the MBO (management buyout) |
This post summarizes an event I followed on behalf of Federmanager Salerno, held in a great location in Florence (limonaia Villa Strozzi), on the 15/04/15, and entitled: “When managers become entrepreneurs: the management buy-out as a model of capitalization mature skills”.
The MBO is technique of transaction whereby the Company’s management, supported by a finance company, acquire the assets and activities, as well as the control, of a company that they already manage. It is directed to a management with great potential who aspire to become owners rather than be employee.
This is also a tool of corporate finance that can be considered a variable to traditional financing, effectively it bypass banks. Unfortunately the conditions for access are often very selective. It could be used strategically if could be accessible form all companies. It would create the conditions for an health change for the benefit of the business itself.
There are also other applications for an MBO, it represents a way to sell the business, frequently with greater margin. Can be used in case of generational change when there is not possibility to transfer the company within the family owners.
The financing required to place an MBO is usually a combination of debt and equity derived from the buyers, lenders and sometimes from the same seller.
Among the advantages of a MBO is that as the existing managers are acquiring the business, they a much better understanding of it and there is not learning curve involved. Another advantage is that the company’s debt load can be lower, giving greater flexibility to the business in order to generate opportunity.
However, can be few potential problems to use the MBO. First is important the relationship between the Management and the former Owner. A potential risk can be the new TEAM. This team, usually formed by the entire management, go often in competition, this generate conflicts with some time the exit of one of the manager and the possibility of failure of the operation. Another problem is the TIME to put an MBO into practice, it is not short! This, makes it not suitable in cases of low finance or when it has been considered for saving the company.
There are few interesting case, two of them were involved into the event: Galileo TP and LFoundry. Both of them very interesting, but LFoundry got my attention. The company with over 200 million euro turnover is pushed from the new Managers/Owners to reach in 5 years the amazing turnover of 1 billion euro. After met the new CEO, and I am confident, he will do it!