Management Buy-In

A management buy-in (MBI) is a transaction in which a manager or team from outside a company acquires a controlling interest in it and replaces or supplements the existing management. The incoming team rarely has enough capital to pay the price itself, so the purchase is normally funded largely by a private equity investor and by debt, with the managers investing a smaller sum of their own.

It is the counterpart of the management buyout, in which the company's existing managers are the buyers. Both are forms of buyout transaction and are usually structured as a leveraged buyout. Buy-ins occur most often when the owner of a private business wishes to retire and has no successor, when a parent company sells a subsidiary whose managers are not seen as able to run it independently, or when investors believe a business is underperforming under its current leadership.

A buy-in may start from either side. An experienced executive, often someone who has run a similar business, identifies a target and then seeks financial backing. Alternatively an investor identifies a company and recruits a team to lead it; some private equity firms keep relationships with a pool of executives for this purpose. The team prepares a business plan setting out what it would change, and the investor tests it.

Because the buyers are outsiders, they depend on what the seller discloses. Due diligence on the finances, customers, contracts and people is therefore more extensive than in a buyout led by insiders, and the sale agreement usually contains fuller warranties from the seller. The price may be fixed through a locked-box mechanism or adjusted after completion, and part of it may be deferred or made conditional on results through earn-out consideration, particularly where the seller's knowledge and contacts need to be retained for a handover period.

The acquisition is made by a newly formed company, which raises the purchase money and buys the target's shares. Funding typically comes from several layers.

• Management equity. The team subscribes for ordinary shares, for an amount that is small relative to the deal but significant to the individuals.
• Investor equity. The private equity fund provides most of the equity, largely as preference shares or shareholder loans carrying a fixed return.
• Senior debt. Banks or credit funds lend against the cash flows and assets of the business, as senior secured debt.
• Junior debt. Where needed, mezzanine financing fills the gap between senior debt and equity.
• Vendor finance. The seller may leave part of the price outstanding as a loan or keep a minority stake.

Managers receive a share of the ordinary equity that is larger than their cash investment alone would buy, which gives them a strong incentive to increase the value of the company before it is sold again. Their shares are subject to leaver provisions that determine the price they receive if they depart, and to restrictions on transfer.

A hybrid structure combines incoming and existing managers and is known as a buy-in management buyout, or BIMBO. Typically a new chief executive or chairman joins members of the current team who stay in their roles and invest alongside. This keeps knowledge of the business and its customers while adding leadership or skills the company lacked, and it is often preferred by investors to a pure buy-in.

Buy-ins are generally regarded as riskier than buyouts, and UK research in the early 1990s found that they tended to perform less well. The main reasons are as follows.

• Information gap. Outsiders know less than insiders about the true state of the business, and problems may emerge only after completion.
• Integration. Existing staff may resist new leaders, key employees may leave, and customers and suppliers loyal to the former owner may reconsider their relationships.
• Execution. The new team's plan depends on changing a business it has not yet run, and its members may not have worked together before.
• Leverage. Debt taken on to fund the purchase leaves little margin if trading falls short of the plan.

Investors mitigate these risks through thorough diligence, by retaining the seller as a consultant for a period, by combining new and existing managers, by setting leverage conservatively and by close monitoring through board representation.

The investor expects to sell within a few years, by a trade sale, a sale to another financial buyer or a flotation, and the managers realise their equity at the same time. A buy-in that succeeds can transform a neglected or founder-dependent business and reward the team substantially. One that fails typically ends in the replacement of the managers by the investor, a restructuring of the debt, or insolvency. In recent years the pure buy-in has become less common as a label, with many transactions described simply as buyouts in which the investor changes some or all of the management, and with search funds, in which investors back an individual to find and buy a single company, serving a similar function for smaller businesses. Minority investments that leave the founder in place fall under growth equity.