Management and Employee Buyout - Explained
What is a Management and Employee Buyout?
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Table of ContentsWhat is a Management and Employee Buyout (MEBO)?How does a Management and Employee Buyout Work?Academic Research on Management and Employee Buyout - MEBO
What is a Management and Employee Buyout (MEBO)?
A management and employee buyout (MEBO) is a type of corporate action that involves the buyout of a firm by its own employees (both managerial as well as non-managerial) as part of a restructuring strategy aimed at transferring ownership from a large number of shareholders to a smaller group. Like any other form of buyout, a management and employee buyout typically involves the purchase of the ownership equity of a company or the acquisition of a controlling interest therein. MEBOs are usually only relevant for small and medium-sized businesses, typically those that do not exceed an employee strength of 500. Large corporations do not opt for such buyouts because such businesses typically need to undergo massive restructuring in order to be privatized.
How does a Management and Employee Buyout Work?
Management and employee buyouts (MEBOs) are most commonly used to privatize publicly-traded business entities. However, it is also common for venture capitalists or other shareholders of a private firm to use such a buyout as an exit strategy to liquidate their stakes in that business. A MEBO often enhances the production efficiency of a firm by augmenting job security for its employees and inspiring them to take greater responsibility for the overall profitability of the business. A management and employee buyout (MEBO) is often exercised during times of financial crisis in order to bring financial stability to the business. A MEBO may also be utilized by a corporation that is interested in disposing of business divisions that do not form an integral part of their core business. Likewise, individual owners of privately-owned businesses may also use MEBOs to facilitate their retirement. During a management and employee buyout, a group of managers and non-managerial employees will acquire the business that they are a part of, by either pooling in their resources such as personal savings and capital, or arranging debt in the form of seller financing or private equity financing. The decision to pick particular managers and employees as would-be owners of the company usually rests on the incumbent board of directors of that company. However, since such a buyout is often a large acquisition, it also calls for consensus among managers and other employees. While a MEBO usually brings about financial stability to a company, it also has paybacks for the management and employeeteam. As a result of a management and employee buyout, these new owners stand to benefit directly from the growth and expansion of the business a privilege previously unavailable to them as employees only. However, such lucrative perquisites are accompanied by added responsibilities. For example, the owners are expected to cultivate an entrepreneurial mindset and ensure that the business has high labor mobility a condition critical for efficiency. However, a MEBO that is burdened with the responsibilities of providing job security and job stability to workers, is often seen to foster labor immobility a situation wherein the laying off of workers becomes almost impossible, even in times of acute financial crisis. There are several other disadvantages of management and employee buyouts. A MEBO can cause a decline in relative compensation of non-production workers. For instance, based on studies conducted on businesses located in the United Kingdom, certain MEBOs have actually resulted in the lowering of average wages of employees, compared to non-buyout industry counterparts. Moreover, in a management and employee buyout, the managers and workers will not only be investing their capital, but also their labor in the same business enterprise. This is a classic instance of the proverbial too many eggs in one basket situation a high-risk strategy from the point of view of any investor. One way out of this situation is for owners to diversify their capital and labor investments. Lastly, a MEBO does not automatically guarantee the end of financial troubles for a distressed firm. Whereas such restructuring involves changes in the form of infusing new capital into the business and creating a new management team, a MEBO by itself is not able to effect these changes. In fact, there are instances where a MEBO has actually slowed down the changes, resulting in managers and workers losing both their jobs as well as their invested capital.
Academic Research on Management and Employee Buyout - MEBO