Advantages and disadvantages of mbo

Answer 1

Advantage buyout ensures the smooth continuation of the business, because the transfer of management, and over a longer period, ownership, is to people who have a good understanding of the company and its potential, and they are often well-known by clients, suppliers, and financial partners Disadvantage In certain circumstances it may be possible for the management and the original owner of the company to agree a deal whereby the seller finances the buyout. The price paid at the time of sale will be nominal, with the real price being paid over the following years out of the profits of the company. The timescale for the payment is typically 3-7 years. This represents a disadvantage for the vendor, which must wait to receive its money after it has lost control of the company. It is also dependent on the returned profits being increased significantly following the acquisition, in order for the deal to represent a gain to the seller in comparison to the situation pre-sale. This will usually only happen in very particular circumstances. The vendor may nevertheless agree to vendor financing for tax reasons, as the consideration will be classified as capital gain rather than as income. It may also receive some other benefit such as a higher overall purchase price than would be obtained by a normal purchase. The advantage for the management is that they do not need to become involved with private equity or a bank and will be left in control of the company once the consideration has been paid.