Business jargon can be confusing even for those with plenty of experience in the corporate world, especially when there are terms that are similar. Those that spend time in business circles will likely hear both LFO and MBO thrown around as these are both common corporate strategies that can occur in any industry. So, what exactly do these mean and how do they differ?
LFO stands for leveraged buyout and involves someone outside of the business arranging money to buyout enough stocks in the company to control equity. Typically, an LFO is achieved through a significant amount of financing that is repaid by selling the assets of the acquired business.
An MBO, meanwhile, is short for management buyout. As the name suggests, this involves the internal management of the company that attempts to buyout the business to assume full control. Management teams usually pool together resources to require all or part of the business and often occur when management want to improve the affairs of a company. MBOs are typically less disruptive as the management team will already be in place and can continue with their work.
Differences & Similarities
While LFOs and MBOs are quite different in a number of ways, it is also true that an MBO is a specific form of a leveraged buyout. Both are part of mergers and acquisitions strategies and can be used by entrepreneurs as part of their exit strategy when the time comes. An LFO can be used to increase market share and to grow a business while an MBO will involve making internal improvements to the business to grow and are, typically, less of a risk.
Both LFOs and MBOs are major processes to go through that can be disruptive from top to bottom. This is why it is important to speak to a management buyout specialist that will be able to guide your business through the process and design deal structures that will keep all parties happy. Additionally, specialists may be able to help management teams to secure the required funding in order to acquire their stake in the business.
In the business world, it is important to be aware of LFOs and MBOs as both are common yet complex strategies that can have a major impact on any organization. While they have some similarities, there are also significant differences to be aware of and both present unique challenges and obstacles to overcome when they are being implemented.