What are the major differences between MBO's and LBO's? What's more profitable, with better returns?
Any ideas/comments anyone?
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mbo is a management buyout, the management team secures a LOI and then get investors to put up the money, they usually get 15-20 percent of the new co, however investors usually want the management team to put up money of their own and depending how much they up they can get a bigger stake in the new co.
lbo is a leverage buyout, where a group such as pe buys a company with a large amount of debt
the returns obvioulsy vary by how sucessful the company becomes
management does get a stake, but usually they don't put their own money in (or very little). It's basically a gift / incentive.
The main difference between an MBO and an LBO is that normally the main investor (PE firm) puts in their own mgmt in an LBO. MBOs mean that the incumbent team (for the most part) stay on. They'll put up a minimum stake and get performance warrants etc as incentive.
Returns as mentioned above depend on the performance of the company/ level of debt.
LBO/MBO can become interchageable as PE like to take a seat on the board, give guidance on cash mgmt but leave the operations to the guys already there. It can be tough to bring the right CEO/COO to the table (they can normally bring a CFO type).
MBO with a quality team of managers will be the key to business turnaround in PE.
most PE investments are leveraged highly. to make the numbers work, managers have to deliver, maximising implementation, minimise the use of expensive consultants, keep the best employees and project good corporate image to the public so when IPO days comes, this company gets sold for top dollar.
Just think this way, will you put money in a small business with a friend without offering him/her share of profit?
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