Management Buy-Out (MBO) transactions are fairly common amongst South African private M&A deals.
In an MBO, a Company’s management team secures debt and/or equity financing to acquire the assets and operations they oversee. Investors and bankers favour MBOs because managers possess deep operational insight, enabling them to enhance value by staying on board.
These transactions often serve as crucial exit strategies for large corporations divesting themselves of unprofitable assets or for private business owners seeking retirement. MBOs streamline the sales process, saving time and expenses associated with marketing to third-party acquirers.
Funding an MBO typically involves substantial capital. Typically, this consists of a mix of debt and equity sourced from buyers, financiers, and occasionally the seller. Given its heavy reliance on borrowed capital, it's categorized as a Leveraged Buy Out (management) transaction.
However, conflicts of interest may arise among executive directors, necessitating their recusal from the Seller’s deliberations. When multiple bidders are involved, Sellers may form special committees of disinterested directors, supported by independent legal and financial advisors, to conduct the deal process in order to ensure a fair deal process and level the playing field for genuine bidders.
A grey area arises in determining the point at which executive directors must inform the Board of their discussions with a private equity firm prepared to fund/participate in an MBO.