In a nutshell: A management buyout (MBO) is when a company’s existing leadership team buys the business from its current owners. Instead of selling to an outsider, the owner hands over the reins to the people who already run the day-to-day operations – giving them the chance to take full control. It’s a way to keep the business in trusted hands while maintaining continuity for employees, customers and suppliers.
You’ve helped build a business you believe in. Now the owner’s ready to move on, and you’re considering taking the reins. A management buyout (MBO) could be your path to ownership. But where do you start?
An MBO lets you turn your expertise into control, using your knowledge of the business to drive its future. It’s a way to translate your ambition into effective planning, financing and making sure the numbers add up.
In this article, we’ll explain what an MBO is, how it works and how to finance it, as well as the advantages, challenges and steps to make it happen.
What is a management buyout?
A management buyout, or MBO, is when a company’s existing management team buys the business from its current owners. Instead of selling to an outside buyer, the owner passes the business to the people who already know it best.
MBOs are a popular way to handle succession or ownership transitions, particularly when the owner wants to retire or move on but keep the business in trusted hands. For you, it’s a chance to take control, shape the future of the business and benefit directly from its success.
But a management buyout involves more than just signing a cheque. It’s a structured process that involves valuation, financing and a legal process. And, while it can be a smooth transition, it may also bring a few challenges – like securing funding and managing the shift from employee to owner.
MBO vs LBO vs MBI vs BIMBO
MBOs are just one way to buy a business. Here’s how they compare to other types of buyouts:
MBO (Management Buyout): The existing management team buys the business
LBO (Leveraged Buyout): Uses significant debt to finance the purchase (can include MBOs)
MBI (Management Buy-In): External managers acquire the business, often replacing the current team
BIMBO (Buy-In Management Buyout): A mix of existing and new management buy the business together
Most MBOs use a combination of debt and equity to fund the purchase. But unlike an LBO, which relies mostly on borrowed money, an MBO often involves the management team investing their own capital too.
What are the advantages and challenges of an MBO?
Advantages of an MBO
For sellers, an MBO offers a smoother transition. They can step away knowing the business is in safe hands that understand its culture, customers and operations. For you and your team, the benefits are just as compelling:
Control: You’re already running the business day-to-day. Now, you’ll have the authority to make bigger decisions and shape its future
Continuity: Customers, employees and suppliers experience minimal disruption. The business keeps its identity, and you keep its momentum
Growth potential: With ownership comes the freedom to pursue new opportunities, from expanding into new markets to refining the business model
Financial upside: If the business grows, you and your team stand to benefit directly.
Preservation of legacy: The owner gets to pass the torch to a team they trust, and you get to build on what’s already working
Potential challenges of an MBO
Of course, there are risks to consider too. The biggest hurdles usually come down to financing and transition:
Funding the deal: MBOs often require a mix of debt and equity. If the business isn’t generating strong cash flow, securing a loan could be difficult. You might also need to put up personal guarantees or assets as collateral
Servicing debt: Taking on loans means committing to repayments, even if the business hits a rough patch. Any missed payments could damage your business credit score and put your assets at risk
Transitioning to ownership: Moving from manager to owner is a big shift. You’ll need to adapt to new responsibilities, including getting to grips with financial planning and long-term strategy
Market conditions: Economic factors like inflation or high borrowing costs can make financing more expensive or harder to secure
Many of these challenges can be managed with the right preparation. For example, a solid business plan and realistic cash flow forecast can help you secure financing.
How does a management buyout work?
An MBO is a lengthy and structured process that involves valuation, due diligence, financing and legal steps.
1. Spotting the opportunity
The first step is recognising that an MBO could be the right move – for both the seller and your team. If you’re part of the management team, this might start with a conversation about the owner’s exit plans. If you’re the owner, it’s about assessing whether your team has the skills and ambition to take over.
Key questions to ask:
Is the management team aligned on the vision for the business?
Do you have the financial resources (or access to financing) to make it happen?
Is the business in a strong enough position to support the transition?
This stage is about testing the waters. If the owner is open to an MBO and your team is on board, you can move to the next steps.
2. Appraisal and valuation
Before you can buy the business, you need to know what it’s worth. There are different ways to value a business, but common approaches include:
Discounted Cash Flow (DCF): Estimates the value of the business based on its future cash flows
Comparable company analysis: Looks at the sale prices of similar businesses in your industry
Asset-based valuation: Calculates value based on the company’s assets (like property, equipment, or inventory)
A valuation is all about negotiating a fair price that reflects the business’s potential and the risks involved. If the valuation feels too high, you might need to adjust the deal structure or consider walking away.
3. Business plan and strategy
Once you’ve agreed on a price, you’ll need to put together a strong business plan to convince lenders or investors to back the deal. Your plan should cover:
Financial projections: How will the business perform under your leadership? Include cash flow forecasts, profit margins and growth plans
Operational strategy: How will you run the business post-buy-out? This might involve changes to staffing, suppliers or customer relationships
Risk management: What could go wrong and how would you handle it? Lenders want to see that you’ve thought through the challenges
A strong business plan shows that you’re ambitious and organised. It can also serve as your roadmap for the first few years of ownership.
4. Due diligence
Due diligence is where you dig into the details of the business to make sure there aren’t any unwanted surprises. This involves:
Financial due diligence: Reviewing accounts, tax records and cash flow to confirm the business is as healthy as it seems
Legal due diligence: Checking contracts, leases and any outstanding legal issues
Operational due diligence: Assessing everything from customer relationships to supply chain stability
This step is critical. If you uncover issues, such as hidden debts or legal disputes, you’ll have a chance to renegotiate the price or walk away before it’s too late.
5. Securing financing
Financing is often the biggest challenge in a management buyout. Most deals use a mix of:
Debt finance: Loans from banks or alternative lenders, secured against the business or personal assets
Equity finance: Investment from private equity firms or the management team’s own money
Hybrid models: Mezzanine finance (a mix of debt and equity) or seller financing (where the owner lends you part of the purchase price)
We’ll look at financing options in more detail later. For now, just know that lenders will want to see a solid business plan, proof of cash flow, and a clear repayment strategy.
Top tip 💡
You’ll typically need to complete steps 1-4 before you approach a lender for financing.
6. Legal and tax considerations
Once financing is in place, you’ll need to handle the legal side of the deal. This includes:
Drafting contracts: Agreements between you, the seller and any investors. You’ll specifically need a Share Purchase Agreement (SPA)
Setting up a Special Purpose Vehicle (SPV): A new company created to hold the assets of the business you’re buying. Note that an SPV is often not necessary for an MBO – your solicitor will advise if one is required
Tax planning: Structuring the deal to minimise tax liabilities (eg Capital Gains Tax for the seller, or Business Asset Disposal Relief)
This is where a good solicitor and accountant become invaluable. They’ll help you navigate the paperwork and make sure everything’s above board.
7. Completion and transition
Finally, it’s time to complete the deal. You’ll sign contracts, transfer the money and officially take ownership. But the work doesn’t stop there. The transition period is critical. You’ll need to:
Communicate with employees, customers and suppliers to reassure them about the change
Implement your business plan and monitor cash flow closely
Address any teething issues as you settle into your new role
Financing a management buyout
Financing is often the make-or-break factor in an MBO. Many deals use a mix of debt and equity, and it’s usually the management team’s responsibility to secure the funding. Here’s how it works:
Who funds an MBO?
In most MBOs, the funding comes from two sources:
The management team: You and your team will typically need to contribute some of your own money (often around 10-20% of the total purchase price to show lenders you’re committed to the deal).
External lenders or investors: The remaining finances usually come from:
Banks or alternative lenders (eg business loans, asset based lending)
Private equity firms (in exchange for a stake in the business)
The seller (eg deferred consideration or vendor loans)
Lenders will want to see that you have skin in the game. If you’re not putting up any of your own cash, they’ll likely see the deal as riskier and that could make financing harder to secure.
Financing options for an MBO
The right financing mix depends on your business’s financial health and your long-term goals. Here are the most common options:
Senior debt: The cheapest form of financing, usually secured against the business’s assets. Interest rates vary, but you’ll often need strong cash flow to qualify
Mezzanine finance: A hybrid of debt and equity, often used to bridge the gap between what you can borrow and the total purchase price. It’s more expensive than senior debt but is less dilutive than equity
Private equity: Investors provide capital in exchange for a share of the business. This can be a sensible option if you need a large amount of funding but don’t want to take on too much debt
Seller financing: The owner may agree to lend you part of the purchase price, which you’ll repay over time. This can make the deal more affordable upfront
Asset based lending: If the business has valuable assets (like property or equipment), you can use them as collateral to secure a loan
How to choose the right financing
The best financing option depends on your business’s stage and your risk tolerance. For example:
If you’re a newer business with limited trading history, you might rely more on seller financing or revenue-based financing (where repayments flex with your cash flow)
If you’re an established business with strong revenue, senior debt or private equity could give you the capital you need at a lower cost
Tools like Tide’s business loan calculator can help you compare options and estimate your repayments.
Tax and legal considerations
Getting the tax and legal details right can save you money and headaches down the line.
Tax implications of an MBO
The tax consequences of an MBO depend on how the deal’s structured. Some things to consider include:
Capital Gains Tax (CGT): If you’re the seller, you’ll likely pay CGT on the profit from the sale. However, Business Asset Disposal Relief can reduce the rate to 10% if you qualify
Stamp Duty: If the deal involves property, you may need to pay Stamp Duty Land Tax
Interest deductibility: If you’re using a loan to fund the MBO, the interest payments are usually tax-deductible
It’s worth working with an accountant to structure the deal in the most tax-efficient way. For example, spreading payments over time (via deferred consideration) can help manage the tax burden.
Legal steps in a management buyout
The legal process involves:
Drafting contracts: Agreements between you, the seller and any investors or lenders
Setting up an SPV: This is a new company created to acquire the business and keep the deal separate from your personal assets
Warranties and indemnities: Protections for the buyer (you) in case the business isn’t as represented
A solicitor can help you navigate these steps and avoid potentially costly mistakes. For example, they’ll make sure the contracts include clauses that protect you if the business underperforms after the sale.
Wrapping up
A management buyout is a big step. But for many, it’s a rewarding one. It lets you take control of a business you already know and love, while giving the owner a smooth exit.
Here’s a quick recap of the key points:
An MBO is when the existing management team buys the business from its current owners. It’s a structured process that involves valuation, financing and legal steps
The advantages include control, continuity and growth potential. But financing and transition can be challenging
Financing usually involves a mix of debt and equity, with the management team contributing some of their own capital
Tax and legal planning are crucial. So work with professionals to structure the deal efficiently and avoid unwanted surprises
Ready to explore your financing options? Take a look at Tide’s business loans to find the right fit for your business.
FAQs
Can I finance an MBO with less than 12 months of trading history?
If your business is newer, financing options may be limited but not impossible. You might consider revenue-based financing, where repayments flex with your cash flow.
How do I know if my business is financially stable enough for an MBO?
Lenders will look at your cash flow, trading history, and business plan. If you can show steady revenue and a clear repayment strategy, you’ll have a stronger case. Tide’s cash flow forecast guide can help you assess your readiness.
What’s the best way to structure an MBO deal to minimise personal risk?
A mix of debt and equity can help balance risk. For example, using asset-based lending (secured against business assets) reduces the need for personal guarantees. Deferred consideration can also ease the upfront financial burden.
How long does an MBO typically take?
From initial discussions to completion, an MBO might typically take around 3-6 months. But the exact timeline will depend on factors like due diligence, financing and the legal process.
What are the alternatives to an MBO?
Alternatives include a trade sale (selling to an external buyer), family transfer, or employee ownership trust (EOT). Each has its own pros and cons, depending on your goals.
Photo by Charles Forerunner on Unsplash
