Management buy‐outs: the impact of ownership changes on performance

Management buy‐outs bring about a change in status of the management team from employee to owner. According to the “agency model”, this change in status provides the financial incentives necessary to ensure that company performance will improve post‐MBO. The key financial incentive present is that the rewards of better performance now accrue to the management team rather than to the previous owners. The “agency model” argues that having a significant financial stake in a company will militate against discretionary behaviour by the new owners. A sample of small management buy‐outs was analysed in terms of two performance indicators, cash management and profitability. Performance was measured against three benchmarks: prior company performance, the performance of companies of similar size and the performance of the industry average. In general, there is no real evidence of better cash management but there is some evidence of improved profitability. The results therefore, offer limited support for the role of incentives proposed by the agency model.