What's the difference between a management buy-in and a management buy-out?

In recent years, there has been a growing number of management teams buying into another business and buying out and running the business in which they were previously employed. Buying into another business is known as a management buy-in (MBI), and the purchase of the business will be funded by a venture capital organisation, in addition to your own money.

You can make an MBI on your own or with one or more members of a team. You need to get the backing of one or more venture capital organisation before you can go ahead. Backing is only likely to be there if you have solid management experience, usually in a large company.

A management team buying out a company that they already work for is known as a management buy-out (MBO). There are three main occasions when this occurs.

First, a large organisation decides to sell or close down a subsidiary. This could be because:

  • The business does not fit the strategy of the organisation.
  • The business does not give the rate of return required by the organisation, or it could even be unprofitable.
  • The parent company does not have the resources to provide the funds needed by the business or it simply needs to raise cash.

Second, a private company may want to sell out. This may be for personal reasons, such as the family not wanting to run the business any longer or the need for cash.

Third, the company may have gone into receivership. There may be part of the business that could be profitable if separated.

Raising money is likely to be the major problem for a management buy-out, as the management team may not be able to finance more than 10 to 20 per cent of the business. There is also a need to raise the money quickly before the opportunity slips. Lenders and investors will want to go through the same process as with any investment or lending decision. A large proportion of the money put up to buy the business will be interest-bearing loans, which can be an onerous burden for a company.

Some MBOs opt to organise as cooperatives with all the workers contributing part of the capital needed and all participating democratically in the way the business is run.

See also: How to complete a successful MBO – Andrew Craig, partner at Maven Capital Partners, runs through the key steps

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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Buying a business

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