The difference between MBO and MBI

Discussing trending topics in M&A, you will come across two very fancy financial terms – the management buyout (MBO) and the management buy-in (MBI). Today, we will drill down these terms and discuss the entrepreneurial spirit that defines these two deal types.

CEOs that are, together with their management team, wishing to acquire the company they are currently working for are preparing for an MBO.
On the other hand, seasoned professionals looking for a new challenge, wishing to buy a company and replace or complement the existing management are preparing for an MBI. Post-transaction, you are not only becoming a shareholder but as well part of the executive management team.

You can also look at an MBO and MBI from the other way around, from the seller’s perspective. If you wish to retire as the shareholder of a business and give the current executive management team a shot to take the company forward and enjoy the rewards of ownership, then you would be looking at an MBO. If you decide to introduce and sell your business to an external management team, that would be an MBI. In both cases, you will sell your business and retire from the management.

As you can now spot the difference between an MBO and MBI, we should discuss the dynamics of both deal types.

The two perspectives of an MBO

Let’s say you are a successful CEO and have the opportunity to acquire the company you are working for. Being the CEO allows you to have an unparalleled understanding of the company and the business you are in. Additionally, you are aware of all the company’s strengths and weaknesses. This certainly gives you a competitive advantage for your deal and reduces the risk of failure. Furthermore, you will have an existing relationship with the current owners and your colleagues, allowing for good conversations and making some negotiations less awkward. Motives driving such a deal (financial vs. non-financial reasons) are usually non-financial and based on the good relationships with the involved parties and your personal transition from employee to shareholder. Under these circumstances, as the deal is more personal, it is of utmost importance to understand the personalities and psychology of the characters involved. When preparing your MBO, you should consider a fallback plan and openly discuss following steps with your fellow management team and shareholders.

Now let’s look at the MBO from the other side. You are the shareholder of a business wanting to see your life’s work in good hands and care for business continuity after the sale. You will then tend to ask the existing management team to take over since you know that they have run your business well. As your current management team is aware of all business ongoings, the transaction process is more streamlined, reducing overall transaction costs and ultimately increasing your purchase price. Furthermore, you will face less risk of confidential information being disclosed to competitors as no data needs to be shared with potential buyers.

The two perspectives of an MBI

In contrast, in an MBI, you and your team are seasoned professionals with deep sector experience but only have an outside-in view of the business you wish to acquire. Given this lack of information, you will have to conduct thorough due diligence and expect full warranty and indemnity protections from current shareholders. The transaction process will require significant attention from management and support staff. As the business’s future owner, you will have to ensure that the transaction process will not affect the daily business. Additionally, your relationship with the employees needs to develop over time, causing a strain on early conversations and leading to you being viewed with some natural scepticism. This type of deal is usually more financially driven since you believe you can provide a change in current business strategy and management, which will have positive effects on the business.

The seller’s perspective of an MBI looks like that you own a thriving business and are about to retire. However, you don’t have an internal successor and have to look for a viable alternative besides the closure of your business. In this case, you will eventually approach external buyers to acquire your business. In a best-case scenario, this will lead to competition amongst potential buyers and thereby increase the purchase price for your business. Another reason for an MBI might be if your business is underperforming or experiencing difficulties which you think could be solved by asking skilled managers to complement your management team. It is again important to understand the effects of the aforementioned information asymmetry on the transaction process, which will require significant caretaking from you.

You will notice that every MBO & MBI is unique and quite different, making them extremely exciting for an M&A enthusiast. Therefore I am thrilled that I could share the groundwork of both deal types here with you.