Why It Matters
The primary difference between a management buyout and any other type of acquisition is the inherent knowledge and expertise of the buyers compared with the sellers. The buyers (management) will usually have more knowledge of the company and its prospects than the sellers. In most scenarios, the sellers rely on the input of management regarding the future of the company to help set the selling price. Here, the advisors become the buyers. In this scenario, the sellers are at a clear disadvantage.
For instance, the management, as buyers, may exploit their advantageous position by manipulating the stock price through certain types of stock sales so that they will achieve a lower buying price. They may also try to lower the purchase price of the company by taking aggressive write-offs in order to show less net income in the period leading up to the purchase. The sellers therefore must use caution with regard to the buyers in an MBO.
Likewise, the management as buyers must also exercise caution with regard to the financiers they bring to assist with the purchase. Venture capitalists, for example, may have different goals than the company’s management team regarding the expected timing and nature of the return on investment (ROI) in the company. In a case where a venture capitalist investor has gained a large enough stake in an MBO, the management who purchased the company may have less control over how to actually manage the company.
Source: Investing Answers
