Which statement best defines a management buyout?

Which statement best defines a management buyout?

• A. An acquisition funded entirely by debt financing.
• B. LBO where a major portion of the newco equity comes from oldco management.
• C. A public offering initiated by management.
• D. A sale of the company to a competitor at a premium.

Answer: (B)

A management buyout is when the people who run the company take ownership by purchasing it themselves. It’s usually structured as a leveraged buyout, with the new vehicle financed largely by debt, and the equity provided mainly by the existing management team. This setup aligns incentives—managers directly benefit from improving performance and increasing value—and often includes some external financing or investors to complete the deal, but the driving point is that the current managers become the owners of the company. This differs from an acquisition funded purely by debt (which ignores who owns the equity), from a management-led public offering (which is about selling shares to the public rather than buying the company itself), or from selling the company to a competitor at a premium (which is a strategic sale, not an ownership transition led by current management).

A management buyout is when the people who run the company take ownership by purchasing it themselves. It’s usually structured as a leveraged buyout, with the new vehicle financed largely by debt, and the equity provided mainly by the existing management team. This setup aligns incentives—managers directly benefit from improving performance and increasing value—and often includes some external financing or investors to complete the deal, but the driving point is that the current managers become the owners of the company.

This differs from an acquisition funded purely by debt (which ignores who owns the equity), from a management-led public offering (which is about selling shares to the public rather than buying the company itself), or from selling the company to a competitor at a premium (which is a strategic sale, not an ownership transition led by current management).