MBIs are similar to a management buyout (MBO) but involve a management company from outside the company: management takes control and ownership of a company to drive it forward.
MBIs usually require external funding from banks or private equity investors, who contribute to the company group and are entitled to a share of the profits if the company is profitable.
Here we’ll be covering the fundamentals of MBIs and BIMBOs in the UK, including:
What is a management buy-in (MBI)?
A management buy-in (MBI) is the acquisition of a business by a management team from outside of the company. MBIs and MBOS are similar in that it is management who become the owners but the management doesn’t have the same inside knowledge as internal management.
A management buy-in team often compete with other purchasers to buy the company. They are usually highly experienced managers with extensive knowledge of the sector. After the acquisition, the buying managers may replace the current board of directors with their own representatives.
Depending on the vendors, a MBI can vary from a 100% acquisition of the business to a controlling stake in the company. Common practice is for the management team to fund the buy-in with a portion of their own capital to ensure they are incentivised to grow the company.
The management buy-in process
An external management team will first need to gather all information about the company that it wants to purchase. This includes doing market analysis of the company, its buyers, sellers, competitors, suppliers and products.
The purchaser will also want to know about any competing buyers who are interested in purchasing the target company. Once it is has completed its due diligence, the external management will begin negotiating an appropriate price with the vendors.
Advantages of MBIs
If the current owners of the company are not able to manage the company then a MBI can be a win-win situation for buyers and the sellers. The new management may have better knowledge and experience which they can use to revitalise the company.
New management may bring new contacts and business opportunities for a company. Current employees may also be motivated by a change of management, particularly if a company is performing poorly.
Disadvantages of MBIs
Management typically lacks the financial power to be able to buy a business outright. This means a seller might not be able to attract the same level of value as selling to a third party. If management do decide to buy then they may require additional financial help from a bank or from private equity fund. This extra funding introduces additional debt and spreads equity thinner amongst investors.
Debt repayments can eat into profits and may reduce the money available to pay dividends. Many investors will also want to exercise some level of control over the company and this may mean that management has to give up some control of the company.
The new management team may also fail to bring the required growth to the company. Existing employees may not appreciate the new management style and may feel demotivated.
Differences between MBIs and MBOs
The main difference between a buy-out and a buy-in is that the management are external to the company. This means that a MBI will generally require more due diligence than a MBO. The external management will not be as well informed as internal management and will need to consider the company’s affairs carefully before making an offer.
Despite the different character of MBOs and MBIs, the legal structure of the transaction will typically be the same. Typically, a new corporate group is formed as part of the management buy-in process. The group will comprise of a holding company and a wholly owned subsidiary. The holding company acts as the investment vehicle for the private equity fund and the managers. The subsidiary by contrast is the company that will acquire the target company.
Funding a MBI
Most MBIs are financed through a combination of debt and equity, although other hybrid sources such as mezzanine and vendor deferred loans may also be used.
Equity will normally comprise of ordinary shares and redeemable preference shares. Subordinated loan capital is also commonly referred to as being equity in a buy-out/buy-in scenario, although strictly it is a type of debt.
Debt finance will normally consist of a combination of senior debt from banks and institutional investors and junior debt (mezzanine, second lien finance, high yield debt and PIK). Senior debt will normally be the largest part of the debt finance in any buyout, and will consist of funds to complete the purchase as well as ongoing working capital.
In a typical private equity transaction, the investors and management will subscribe for shares in the holding company and its subsidiary will act as the bank debt and acquisition vehicle.
MBIs and private equity
A high proportion of buyouts are financed by private equity. MBIs will almost certainly involve private equity backing because they represent a higher risk to an investor than a MBO.
Private equity funds will commonly invest money in a MBI in return for a proportion of the shares in the company, although it is not uncommon for private equity backed-deals to involve a loan component as well.
Management teams should be aware that private equity funds may have different goals. Private equity backers tend to look to make a return (aka ‘exit’) on their investment in three to five years. Management, by contrast, tends to hold a longer term view perhaps extending to the end of their careers.
Private equity backers will also want to conduct extensive due diligence before making an investment. This may even include psychometric testing of the management team.
What is a BIMBO?
A BIMBO is a buy-in management buyout that combines characteristics of both a management buyout and a management buy-in. A BIMBO occurs when existing management, together with outside management, decide to buy out a company. The existing managers represent the buy-out portion while the outside management represent the buy-in portion.
BIMBOs are normally a type of leveraged buyout (LBO) that aim to refresh the direction of a company and streamline its operations. External management offer an influx of new ideas, experience and contacts to revitalise a company.
What are the disadvantages of a BIMBO?
For a BIMBO to work, new and existing managers must get along. New managers will likely have new ideas that they wish to implement right away while existing managers may wish to protect their own turf. This can result in conflict and employees taking sides. Pronounced conflicts between management may distract from the core business and may mean that a company doesn’t run as intended.
BIMBOs often involve an increase of debt on the balance sheet of a company. Management should be careful that the fundamentals of the business are adequate enough to service this debt and not cause financial stress for the company.
