What is an MBI and an MBO?

Change is a common characteristic within business and it is not uncommon for a company’s management and ownership to change after incorporation. Furthermore, in a post-pandemic climate, business owners are now more than ever looking to establish long-term succession plans. 

One of the most common ways that a company’s ownership can change is through a management buy-out (MBO) or a management buy-in (MBI).

What is an MBO and MBI?

Typically, a company will undergo an MBO or MBI when the shareholders wish to retire from their roles and exit the company. 

An MBO is when the company’s existing management team purchase the ownership of the company from the existing shareholders and take control of the running of the company.  In contrast, an MBI is when an external management group purchase the ownership of the company. This external group will purchase the company with the intention to either remove the existing management from their role or to complement the existing team. 

Therefore, dependent on whether the retiring shareholders intend to back their management team to take the company forward, or if it is concluded that an external management group should be introduced, this will determine whether an MBO or MBI is pursued. 

Company Vision: The Final Framework

There are pros and cons to every form of acquisition type.

One of the key advantages of an MBO is that the existing management team will already understand the business; they will have an appreciation of the culture, values, key client bases and internal targets. In comparison, any external group that is introduced into the company will have to learn this over time. 

Furthermore, from a seller’s perspective, retaining the management team can provide the company with greater security. One of the ways risk is minimised is due to there being an existing confidence and relationship with the incoming owners. The current shareholders will have worked with their management team and know how those individuals operate. Unsurprisingly, the commitment to the company and individual working practices cannot be guaranteed when an external group is introduced. 

Additionally, there will be a difference in the depth of due diligence required for an MBO and MBI. It is perhaps more attractive to sellers to undergo an MBO as the due diligence process will be substantially less invasive as the existing management team will already have an appreciation of the company’s challenges. Through an MBO you are not required to disclose commercially sensitive information to a third party and you will save both time and money in the due diligence process.  

In many instances the type of companies that external management groups buy into are those that are already underperforming or have ineffective management or management that lack a desirable skillset. The huge benefit of an MBI is that these external management groups have strong financial reserves, either through their own backing or external investor funding. They will in addition have specialist industry knowledge that can be used to aid the company. This in turn can have a positive effect in creating new working environments and motivate existing employees. 

How can Moore Barlow assist you?

MBOs and MBIs need careful structuring to succeed.

It’s important you have practical advice from an experienced corporate law team on how the MBO/MBI should be structured, creating a shareholders’ agreement that covers all eventualities and sourcing the most appropriate and reliable finance. Most of all, it’s vital you continue to focus on running the existing business and not be distracted by the buy-in or buy-out.

With extensive experience of supporting MBOs and MBIs, we can help ease the pressure on you, so you can devote the time needed to run the business. In the meantime, we will devise a structure that meets your objectives, avoids potential pitfalls and incorporates the flexibility to help the business grow.

Get in touch with Moore Barlow’s Corporate Law team now.