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management buy-out (MBO)the TAKEOVER of a firm, or of a division of a firm, by its existing management team from, in the former case, the shareholders of the firm, or in the latter case, the firm's main board of directors subject to shareholder approval. The purchase of a division of a diversified firm (see DIVERSIFICATION) by its management is a form of DIVESTMENT which can be beneficial to both parties. The disposer's motive is usually to get out of a particular activity which is no longer considered to fit in with its strategic plans for developing the business, and to use the monies released to strengthen its activities or acquire new businesses. From the buyer's point of view, there is the challenge of running one's own business and the potential for making a greater success of an activity which perhaps, because of insufficient support from above in its divisional form, had previously been underperforming. The rekindling of entrepreneurship in the hands of owner-managers is seen to be a key advantage of a management buy-out.
A critical factor in the success of a management buy-out, apart from the obvious need for managerial competence (and a little luck!) is the price paid for the business and the related financial package for acquiring it. The members of the management team will provide a percentage of the purchase price from their own personal funds and own a large amount of the SHARE CAPITAL, with the balance of funds often being provided by LOANS from merchant banks and venture capital specialists. Alternatively, the balance can be obtained by selling shares to the workforce either directly, or indirectly to a trust, as part of an EMPLOYEE SHARE OWNERSHIP PLAN. One advantage of this solution is that it enables the management team to avoid an overdependency on outside interests and unrealistic CAPITAL GEARING levels. See JUNK BOND, MANAGEMENT BUY-IN, DEMERGER, BUSINESS STRATEGY, VENTURE CAPITAL.