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Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests + Website, 2nd Edition by Robert T. Slee

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CHAPTER 28

Management Transfers

The term “management transfer” refers to two different situations. A management buyout (MBO) occurs when an existing management team purchases all or part of the company in which they are employed. A management buy-in (MBI) occurs when a management team buys all or part of a business in which it is not currently involved.

Successful management transfers rely on the valuation and capital structure formation areas of the triangular body of knowledge. All parties must first value the company. These valuations may take place in several different value worlds and involve various capital access points, depending on who is valuing what. For instance, the seller may value the company in the world of owner value while the managers value the company in the world of investment value or the financial subworld of market value.

Secured lenders value the company in the world of collateral value. Ultimately a deal is structured with the seller, possibly using other transfer methods, such as employee stock ownership plan (ESOPs). Finally, the deal must be financed, which may require assembling several capital types, such as bank, mezzanine, or equity capital.

Management transfers generally occur under three different circumstances:

1. Corporate divestitures. A corporate parent decides a division is no longer core to its strategic direction.

2. Private owner. The controlling shareholders of a private company decide to sell the business.

3. Failed business. A bankruptcy ...

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