The venture capital industry has played a crucial role in the development of buyouts in Europe, especially in smaller deals in the UK, the Netherlands, and France.
The impending possibility of an MBO may lead to principal–agent problems, moral hazard, and perhaps even the subtle downward manipulation of the stock price prior to sale via adverse information disclosure, including accelerated and aggressive loss recognition, public launching of questionable projects, and adverse earning surprises.
[2] Naturally, these corporate governance concerns also exist whenever current senior management is able to benefit personally from the sale of their company or its assets.
The mere possibility of an MBO or a substantial parting bonus on sale may create perverse incentives that can reduce the efficiency of a wide range of firms—even if they remain as public companies.
Companies that proactively shop aggressive funding sources should qualify for total debt financing of at least four times (4×)[citation needed] cash flow.
If a bank is unwilling to lend, the management will commonly look to private equity investors to fund the majority of buyout.
The private equity investors will invest money in return for a proportion of the shares in the company, though they may also grant a loan to the management.
The exact financial structuring will depend on the backer's desire to balance the risk with its return, with debt being less risky but less profitable than capital investment.
They generally aim to maximise their return and make an exit after 3–5 years while minimising risk to themselves, whereas the management rarely look beyond their careers at the company and will take a long-term view.
It is also dependent, if an earn-out is used, on the returned profits being increased significantly following the acquisition, in order for the deal to represent a gain to the seller in comparison to the situation pre-sale.
The optimum structure would be to convert the earn-out to contracted deferred consideration which has compelling benefits for the seller as it legally fixes the total future amount paid to them.
The advantage for the management is that they do not need to become involved with private equity or a bank and will be left in control of the company once the consideration has been paid.
On September 17, 2007, Richard Branson announced that the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from November 2007, will be known by a new name, Zavvi.