Management buy-in

Purchase of a company (or a controlling interest) by an external investor (often a private equity firm). In a management buy-in, the management is replaced by new management who were not active in the company prior to the transaction. The intention is to gain control of the company.

Management buy-in (MBI) or management participation is a form of company takeover in which an external management team acquires a stake in an existing company. The management team buys part or all of the company and takes over the management.

However, not only is the existing management replaced, but the entire company changes hands.

A management buy-in is also an opportunity to take over a company as part of a succession solution.

Medium-sized companies in particular often lack a suitable successor. Children and other relatives often do not want to take over the business and employees lack the financial means. Therefore, a management buy-in (MBI) is often the only option for the continuation of the business.

However, the company is then often taken over by experienced managers who cannot identify with the company, the sector or the brand. However, this is essential for medium-sized companies in particular.

If the company to be sold is not economically distressed, it often has no need for optimization at all. However, external managers often try to optimize or improve more and more. This can easily lead to the opposite in a healthy company.

Once the owner of a company has decided to sell his company to external management, he must of course first find interested parties. Many channels can be used for this. Management consultants also help in the search for a suitable successor.

Once a suitable interested party has been found, the following steps are taken:

1. Confidentiality agreement (NDA)
2. General conditions of the planned transaction
3. Drafting a letter of intent (LoI)
4. Due diligence
5. Company valuation
6. Contract negotiations
7. Purchase contract
8. Transaction of the company shares
9. Integration and implementation

Management buy-in is often carried out by experienced executives who bring industry-specific expertise and management experience and see the opportunity to maximize a company's potential by contributing their skills and strategies.

The sale of a company can be voluntary or involuntary.

• If an entrepreneur is looking for a successor, the sale is amicable and is referred to as a peaceful takeover.
• A hostile takeover is when an external management team attempts to gain control of the company against the will of the owner. Hostile takeovers often occur in public limited companies. In this case, major investors attempt to gain a majority stake in order to gain control of the company.

New management brings fresh impetus and additional know-how. This can be brought into the acquired company. This is particularly advantageous for companies in which the management is being replaced due to age. There is therefore the opportunity for new innovations and any existing "operational blindness" is replaced. A new management team can provide fresh impetus, particularly in the case of a struggling company, and thus possibly save it from insolvency.

External management is often unfamiliar with the industry and the day-to-day running of the business. This can pose a risk to the continued existence of the company.

Although many managers have the necessary management experience, they have too little knowledge of the industry and the company. This can lead to serious misjudgments. Training external managers can take a long time, as they first have to familiarize themselves with all the details of the company. This can be serious if the company is in financial difficulties, as there may not be enough time.

In the case of a management buy-in (MBI), the external managers often lack equity and the purchase must be largely financed by debt. This means that the company often has to make repayments and interest payments long after the takeover.

Leveraged buy-in

Leveraged buy-in (LBI) means that an external management team takes over a company in full or in part. The financing of the target company is mainly financed by borrowed capital.

BIMBO

Buy-in management buy-out (BIMBO) is a combination of management buy-in and management buy-out. Here, part of the company is bought by the existing management. The other part of the company is bought by external managers.

1. In practice, it has proven difficult to determine or agree on a purchase price that is acceptable to both seller and buyer. On the one hand, the seller wants to achieve an appropriate price for his life's work and, on the other hand, the company should generate the purchase price itself over the next seven to ten years at the most from the perspective of the management buy-in candidate.
2. Another major challenge is time. Most entrepreneurs are reluctant to retire from their company and keep it as long as they can. Only when they reach their physical and mental limits do they start to think about company succession. Even if a suitable successor is found, a transition period of 1 to 3 years must be allowed for the succession. In addition, early succession planning improves the qualitative rating that banks and savings banks use as a basis for granting loans.
3. Expectations that are too high when older entrepreneurs in particular enter into succession negotiations are also a challenge. For the most part, they associate a very high sentimental value with their company. However, the sentimental value is individual and is not a basis for determining the purchase price. Only a valuation can determine a realistic purchase price.
4. Ultimately, it is also challenging to find a successor with the appropriate know-how as well as the entrepreneurial and technical requirements. However, this is a basic requirement, as otherwise it cannot be guaranteed that the business will continue to exist.

1. While the incoming managing director is usually interested in joining the company in the long term, both at management level and in terms of shareholder status, the aim is also to completely replace the financing investors over a foreseeable period of time. These investors are directly involved in the transaction and often acquire shares in the company themselves - at least for a transitional period. Depending on the volume of the transaction, however, a complete acquisition of the company by the future managing partner can also be considered if only credit institutions are available for financing.
2. Constellations are also conceivable in which the seller retains a small stake in the company for an interim period or supports the buyer with a vendor loan to finance the transaction. In this way, the seller remains committed to his company in the future and will work towards its successful development in his own interest.
3. Another variant of the management buy-in involves a (financial) investor seeking the expertise of the manager and, as an incentive, allowing him to become a shareholder so that he also participates in the value of the company in the event of a joint sale. The manager is often given the opportunity to acquire shares at special conditions (sweet equity) if certain sales and/or earnings targets are achieved, so that he or she benefits disproportionately from the subsequent sale of the company.

In these cases, the tax office checks whether gift tax or income tax is due. However, gift tax is generally not applicable in the case of transfers between strangers.

However, the tax office checks whether the manager has received a non-cash benefit. A non-cash benefit arises if the company share was transferred at a lower price than its market value.

The management buy-in results in entrepreneurial independence. This makes the management buy-in, like the management buy-out, a special case of business start-up through takeover. As the financial resources of the successor are usually limited, access to external equity financing is an essential prerequisite for structuring the overall financing in the case of management buy-ins and management buy-outs.

As only one financing round is often agreed for management buy-in financing, the management must then make do with the promised financing. This puts great pressure on the management team to implement the corporate development outlined in the business plan.

The financing of a restructuring management buy-in is carried out in a financing round. The basis for this is the restructuring and financing concept developed by the new managing directors, which is documented in the business plan. The following proportions of financing types characterize typical management buy-in financing structures in crisis companies:

• Due to the risks involved, a relatively high equity ratio (25-40%) must be assumed in the balance sheet.
• This is offset by a lower proportion of debt capital in the form of senior debt (senior secured funds amounting to 20-40% of total financing) compared to the stable management buy-in.
• Debt is supplemented by subordinated mezzanine financing (20-30%), e.g. in the form of subordinated loans, silent partnerships or loans with option or conversion rights.

There is potential for securing debt capital in the form of the acquired company's fixed assets. However, their valuation is rather low due to the uncertainty as to whether the assumption of a going concern principle is realistic. Another complicating factor from a financing perspective is that, due to the takeover situation, part of the capital injected flows to the seller as the purchase price and is therefore not available to the company. If necessary, however, the management team and the financiers can insist that the purchase price or parts of it remain available until the successful completion of the restructuring.

There are different types of management buy-in (MBI), which can vary depending on the circumstances and the parties involved.

Here are the most common types:

• Full management buy-inIn a full management buy-in, the external management team acquires the majority or a significant stake in a company in which it was not previously active. The management team takes control of the company and manages it from then on.
• Partial management buy-inIn a partial management buy-in, the external management team acquires a minority stake in a company. In this case, the existing management or owners retain part of the shares and possibly also control of the company.
• Secondary management buy-inA secondary management buy-in occurs when the external management team acquires shares in a company from another management team or another investor. This can occur, for example, as part of a company succession or a strategic realignment.
• Tertiary management buy-inIn a tertiary management buy-in, the external management team acquires shares in a company from another external management team that has previously carried out a management buy-in. This usually happens when the original management team decides to leave the company or retire.
• Management buy-in for family businessesIn some cases, a management team may use external funding to acquire a stake in a family business. This may be part of a succession plan or aimed at transitioning the business to a more professional management structure.

The choice of management buy-in type depends on various factors, including the size and structure of the target company, the preferences of the current owners or management, the financing options and the objectives of the management team carrying out the management buy-in.