What is a major disadvantage of a Management Buyout?

In a Management Buyout (MBO), the existing management team of a company purchases the business from its current owners. One significant disadvantage of this arrangement is the potential for income loss if the company faces liquidation. This risk arises from the fact that after a buyout, the financial structure of the company might change, leading to increased debt obligations as the management team may finance the buyout through borrowed funds. If the company's performance falters post-buyout, the increased financial strain can result in liquidity issues, making it challenging for the company to meet its obligations. In extreme scenarios, this can lead to liquidation, ultimately causing income loss for the stakeholders involved, including the management team who may have invested their resources into the buyout.

The other options do not accurately reflect fundamental concerns associated with a Management Buyout. The presence of a willing buyer is not in itself a disadvantage; rather, it is a prerequisite for conducting an MBO. Guaranteed income from the outset is not a characteristic of MBOs, as financial outcomes can be uncertain depending on business performance. Similarly, the availability of immediate liquid assets is typically not a feature of MBOs, especially since funding often depends on leveraging the company’s future earnings rather than cash at hand.