Management Buyout

Management Buyouts (MBOs) are similar in all major legal aspects to any other corporate acquisition.  The particular difference of the MBO lies in the position of the buyers as managers of the company.  As such, the due diligence process is typically limited as the buyers have full knowledge of the company available to them.  This fact also results in most MBOs having very low transaction risk due to the fact that there is typically little to no change in management, which makes these types of transactions extremely attractive to investors. 

In a MBO, business owners and/or management decide it is in the best interest of the company for the management (or its minority shareholders) to buyout the existing majority owners. The typical financing structures utilized to accomplish this consist of either seller paper or are configured as Employee Stock Ownership Programs (ESOPs).  Both of these financial instruments rely upon management buying out existing owners over time and does not allow for the existing owners to fully cash out.  As a result, a potential conflict is created between owners and management because the seller still possesses a substantial stake in the company through either a personal guaranty or reliance upon future cash flows to pay off the seller note.  However, from the new owner’s perspective the conflict and burden these types of structures create is also significant, as every decision going forward has the potential to be questioned and criticized if the former owner perceives risk to their payment stream.

Prospective management or minority acquirers are often reluctant to enter into an MBO type transaction because they are simply unfamiliar with the procedure or believe they will not qualify for financing.  Tunstall Consulting specializes in helping clients through the Management Buyout process and creating leveraged buyout alternatives. These alternatives provide sellers the ability to either fully or partially liquidate their ownership positions based on their goals or enable the new owners to operate the business on a truly independent basis.  Further, once the original owner is either fully or partially cashed out from the transaction, there always exists the ability to re-invest capital in the business if desired.  This is especially beneficial when transferring ownership to younger generations as part of a succession planning scenario.

In summary, whatever the specific transition and liquidity goals may be, financial institutions eagerly seek these types of investments as transition risk is significantly reduced or eliminated because it is the current management team they are backing as the acquirer.