What is a Management Buy-Out?

A management buy-out involves the current managers or management team of a particular business becoming the owners. These management buy-outs often take place when a large firm restructures its operations and sell off the parts which do not fit into its plans for the future.

When Does a Management Buy-Out Take Place?

Often a firm will only do this when the part is struggling, as they are likely to keep profitable divisions, although this is not always the case as there are times when a firm may which to sell of a certain part. For example, it may wish to use its existing resources to focus on its core activities or to try and turn around struggling divisions. It may feel it has taken the operations in question as far as they are able to take them and are willing to sell at a good price. The business may also be forced to sell certain operations if regulators deem it to have too large a market share which is preventing sufficient competition.

Risk Versus Reward of a Management Buy-Out

A management buy-out has a significant element of risk versus reward for the new management team

If the particular division is struggling, the managers take a large financial and/or reputational risk in taking control as they need to turn the business around in order to make a profit, which it could be argued was their task in the first place when they were working for the parent company. If they were not able to achieve it then, there is a good chance that they will be unable to now. However, with their own money at risk and a sense of ownership, the management team is likely to be more motivated to succeed than they were before, which will hopefully rub-off on their employees.

The management buy-out may also have been accompanied by a fresh injection of capital either by themselves of by another investor such as a venture capitalist, which may allow for spending on things such as advertising, new equipment or attending management training courses which give them the managerial skills that could mean the difference between success and failure. Although they are unlikely to need a course like a First Line Manager course because they already have experience in a managerial role, additional management courses or training in other related areas such as interpersonal skills will be highly beneficial.

How is a Buy-Out Different to a Management Buy-In?

A management buy-out is different to a management buy-in, where an outside management team buys-in to a business to take control, rather then the current managers that run the businesses.