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A2 Objectives and Strategy – Unit 6

A2 Objectives and Strategy – Unit 6. Management buyouts (MBO). Management buyouts. The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it. Methods of finance for buyouts. Managers personal funds Bank loans

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A2 Objectives and Strategy – Unit 6

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  1. A2 Objectives and Strategy – Unit 6 Management buyouts (MBO)

  2. Management buyouts • The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it.

  3. Methods of finance for buyouts • Managers personal funds • Bank loans • Investment funds obtained by selling shares to employees • The most common is, venture capitalists or private equity firms lend the MBO by taking a stake in the business for a return of about 25-30% over 3-5 years

  4. Reasons for buyouts • Large businesses may sell off a small section to raise cash, refocus, or get rid of an unprofitable activity. Management may feel this activity could be run profitably in a different way or more finance • Family owned companies may prefer to sell to the existing management hope of maintaining employment and consistency • Firm may be in hands of receivers and selling part of business to managers will raise finance to pay creditors

  5. Reason sold Finance Information sourced from http://www.chorion.co.uk www.bbc.co.uk

  6. Finance Reason for sale Information sourced from www.bbc.co.uk and www.peacocks.co.uk

  7. Rewards of buyouts • Management and employees have more motivation and responsibility • No owner manager conflict so objectives may be clearer • Less bureaucracy as no head office so no hindering progress • Profits will not be diverted to another part of the organisation • If successful the company may be floated on stock market or selling shares in a takeover offer

  8. Risks of buyouts • Personal losses for new owners if unsuccessful • Original owners may have been right to sell if unprofitable. Why will it change? • Little access to capital? • Considerable rationalisation and job losses may follow, therefore adverse morale

  9. Are buyouts a good thing? • 314 MBOs completed in the first half of 2004 – 12 a week – total value of £7.6 billion • Some say if managers see value in the firm they should deliver it to the shareholders • Workers may be more at risk than if owned by a larger firm • Jobs may not have existed if there had been no MBO

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