Certified Financial Management Specialist Practice Exam

What happens in a management-led buyout (MBO)?

1. Executives sell their stake in a company

2. Executives purchase a controlling stake in another company

3. Executives merge their company with a competitor

4. Executives are laid off during a takeover

The correct answer is: Executives purchase a controlling stake in another company

In a management-led buyout (MBO), the executives of a company decide to purchase a controlling stake in that same company, often with the help of external financing. This scenario typically arises when the management team believes that they can operate the company more effectively than the current owners, potentially leading to improved performance and value creation. The MBO allows the management team to take control of the company, aligning their interests directly with its success. This can foster a sense of ownership, commitment, and drive to implement strategic changes that may have been challenging under the previous ownership structure. As they now have a financial stake in the company, the executives are highly motivated to work toward its growth and profitability. In contrast, the other options describe different situations involving executives and companies that do not align with the concept of a management-led buyout. Executives selling their stake or being laid off does not reflect the buyout scenario, nor does merging with a competitor, as both entail different strategies that do not involve purchasing control over the same organization by its management team.