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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

Management of Delta Co plan an MBO. Which is the most important reason why a management buy-in (MBI), rather than an MBO, is generally regarded as riskier by funders?

An MBI is riskier mainly because the incoming outside managers lack inside knowledge of the business and may lack credibility with employees and customers, which raises execution risk for funders. Existing managers in an MBO already know the operations, strengths and weaknesses of the company.

  1. AThe incoming external managers lack detailed knowledge of the business and may have less credibility with staff and customersCorrect
  2. BThe incoming managers always pay a higher price than existing management would
  3. CAn MBI cannot use debt finance, whereas an MBO can
  4. DAn MBI requires approval from the target's tax authority before completion

Explanation

In an MBI the new team comes from outside, so it has less inside knowledge of the business, its staff, customers and hidden problems. This increases execution risk for investors. Debt finance is available in both cases, and no tax approval is required.

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