When the management team that run a business decide to buy it, it is known as a management buy out. Management buyouts are not restricted to managers and can involve employees at all levels in the organisation. This could be employees who want to share in the success of the business or others who feel that they could successfully run the firm as they have better knowledge (than the present owners/executive board) of events ‘on the ground' and in the business world.
Management Buyout Reasons
There are many reasons why the management team may decide to buy the business they are working for including:
Advantages of Management Buyouts
- Increased motivation from employees that own the business as the success of the business personally affects them
- New owners can make decisions based on their experiences as employees including implementing changes based on employee and customer feedback
- If the business was part of a larger group of companies, separation from that group should increase efficiency as there is no longer the need to discuss decisions with the group or head office. There is also the opportunity to implement decisions which benefit the business instead of decisions that were designed to benefit the group
- If the business was part of a larger group of companies, there could be a decrease in costs as there is no longer a need to contribute towards group costs. The business will also have greater control over their own budgets and can choose suppliers that suit the business rather than the group of companies.
Disadvantages of Management Buyouts
- If the company was sold because it was struggling there could be a lot of work involved in turning it into a successful business. The probability of a successful management buyout will depend on the reason why it was struggling.
- The management team may not have the money to buy the company and it may be difficult to secure a loan to buy the business especially if the business is struggling. To secure loans to buy the company the management team may have to provide personal guarantees or remortgage their own properties/homes.
- The success of the buyout is dependant on the strength, skills and vision of the management team buying it. If the business was struggling due to the competence of the current management team is unlikely to improve if the current management team continue to lead it after the management buy out.
- If the business was doing well due to the current owners after the management buy out the new owners will need to devise a strategy to deal with the departure of the current owners.
Buying a business is a major decision and should be taken following careful consideration. There is a big difference between working for a company and owning a company. As an owner there are many responsibilities and financial commitments which will impact on the life of any employee deciding to engage in a management buyout.