Management and leveraged buy-outs are sale transactions in which inside or outside professional managers purchase equity in the firm, often with the use of large loans or debt. Leveraged buyouts were used in the 1980s to turn quick profits by purchasing a firm and selling its various departments or operational units off to other companies for a profit (Petty, 1997). The tactics used in these leveraged buyouts are the same as those used in management buyouts but the goals of the purchases are different – quick profits versus ownership of an ongoing, profitable business.
Management buyouts are often used as a way for senior firm management to take over the business, freeing the founding entrepreneur from his role and transferring control of the firm. These transactions commonly use large amounts of external debt financing. The debt financing is then paid down by selling off non-essential assets and making payments using the dividends and profits from the business (HBS, Harvest Time, 2006). Management buyouts mean that the firm is under the close scrutiny of the lending institutions behind the financing. Therefore management is often keen to pay back their debt as quickly as possible.