What is a MBO? What is a MBI? What is a BIMBO?

A Management Buy Out (MBO) is a way of buying companies whereby the company's management team takes control of the company with the backing of a financial investor, using a relatively high amount of debt to finance the transaction. The company takes on the debt, which is guaranteed with the company's own assets and its ability to generate cash flow to repay the debt.

In these kind of leveraged buy-outs, increases in the value of the assets bring about multiple increases in the value of the capital and reserves. However, these transactions are only suitable for companies whose future cash flows are easily predictable since in a situation in which cash flow generation capacity is reduced to levels that make it difficult to repay debt, the multiplier effect on capital and reserves associated with the strong leverage of the company causes drastic reductions in the value of the shares.

Value creation in a MBO depends on the growth achieved in asset value (Growth Buy Outs), gradual reduction in the company's debt due to repayment (Cash Buy Outs) or both factors. From the point of view of the venture capital companies that work with the management team, a Growth Buy Out is always more attractive because it allows the value of the shares to rise more quickly and therefore gives obtain higher rates of return on their investment.

A Management Buy In (MBI) or a Buy In Management Buy Out (BIMBO) are transactions with the same leveraging characteristics as a MBO.The main difference resides in where the management team comes from. In a MBI, the management team that takes control of the company comes completely from outside, while a BIMBO is a combination of a MBI and a MBO, where the management team is made up of current managers from the company and new managers who join. These MBO variants are riskier due to the management and organizational uncertainties generated by bringing new managers into the company from outside. The growth in Management Buy Outs (MBO) in recent years is a sign of the flowering of venture capital in Spain. The main reasons behind the growth in these kinds of transactions is the abundance of investment capital available in the market, large companies' plans to get rid of non-strategic assets, family owned companies with problems handing the business on to the next generation and the appearance of consolidation opportunities in many sectors.