• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 12. Harvest > Management Buyout

Management Buyout

MBOs are typically classified as financial engineering strategies. In an MBO a small group of senior managers within the firm attempt to purchase the company from the existing shareholders. These transactions often include some form of leveraged financing, but only in the larger cases. For the smaller ones (especially franchisees operations), the team may be able to raise the necessary funds from their own resources. On the franchisor side, management seldom has the resources to complete the transaction. So, like the takeover artists of the 1980s, Carl Icahn and T. Boone Pickens, management will seek some equity and usually heavy debt financing to consummate these deals. A heavily leveraged deal puts pressure on the company to increase free cash flow for debt service.

A leveraged buy out or management buy out (LBO/MBO) strategy can make sense when the acquirer of the franchisor uses the base royalty stream to secure debt and infuses significant equity capital into the company. As we discussed, that is a very difficult task for a franchisor because of the franchisor’s ongoing need to funnel free cash flow into growth plans. Another tactic of the LBO/MBO is to sell off assets of the company to reduce debt. This usually occurs where there are parts of the business that are not relevant for the new owner. That is unlikely to be the case for a franchise. Unfortunately for the franchisor, an LBO/MBO signals a dramatic retreat from growth. In this case, selling franchises and gaining the support of the franchisees becomes exceedingly difficult.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint