An agency theoretic analysis of value creation through management buy-outs of family firms

Family firms without able and willing family successors are frequently sold to non-family managers through management buy-outs (MBOs). Whether MBOs create value is thought to be dependent upon the ability to reduce owner–manager agency costs. In this article we examine the agency costs of MBOs that acquire family firms. We contribute to theory by arguing that in such situations, value creation by reducing agency costs will depend upon pre-MBO agency costs, the ability to solve the double agency problem, and the relationship between the cost of agency control mechanisms and the residual losses from opportunism before and after the MBO.

► Studying management buy-outs (MBOs) of family firms is important because MBOs are often a viable alternative to intra-family succession.
► Studies of MBOs of family firms are important theoretically because through the change from concentrated family ownership to concentrated non-family ownership, they can help differentiate between concentrated ownership and family ownership, a difficult empirical problem in family business research.
► Contrary to the prevailing belief that MBOs create value by decreasing total agency costs, value creation will depend upon the ownership–management configuration of the firm pre- and post-MBO.
► Double, or manager–manager, agency issues are especially important in MBOs of family firms.
► Following an MBO, the mix of agency costs will tend to shift due to residual losses from uncontrolled opportunism toward the costs of mechanisms used to control agency problems.
► The changes in the amounts and sources of agency costs after an MBO have important practical implications for families contemplating the sale of their businesses.