How do I plan a management buyout?

In some cases, an MBO is the best answer


When looking to exit, a business owner has a number of options. One of these is to sell the company to the existing management team. 

A sale to management may be preferred to a trade sale for a variety of reasons, for example, the number of potential trade buyers may be limited, the vendors may be nervous about approaching competitors and disclosing sensitive information or they may feel strongly that the company and its staff carry on independently in what they believe to be “safe hands”.

What is a management buyout?

In its simplest form, a management buyout (MBO) involves the management team of a company combining resources to acquire all or part of the company they manage. Most of the time, the management team takes full control and ownership, using their expertise to grow the company and drive it forward.


For a company undergoing a change in ownership, the management buyout route offers advantages to all concerned. Most obviously, it allows for a smooth transition of ownership. Since the new owners know the company, there is reduced risk of failure going forward, other employees are less likely to be concerned and existing clients and trading partners are reassured it will be “business as usual”. Furthermore, the internal changes and transfer of responsibilities between the vendors and management remain confidential, while any due diligence required by funders is often handled quickly.

The strength of the management is a critical factor in contemplating the potential future success of the company. Therefore, any funders pay close attention to the skills, experience, knowledge and credibility of the management team as well as their vision for taking the company forward.  And while the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial, and all parties need to ensure this is a transition that is achievable.

Funding a management buyout

Of course, for an MBO to be successful, vendors must be willing to sell the company at a realistic price and with a fundable deal structure. It is rare that a management team will have sufficient funds on their own to buy the company and external finance will be needed, so MBOs are usually funded via a combination of sources:

  • Management contribution – while they might not be able to fund the whole transaction, the management team is usually required to introduce personal funds, to provide confidence to a funder and to demonstrate commitment – a rule of thumb is one year’s salary but funders may be flexible on this depending on the perceived risk of the transaction;
  • Asset finance – via leveraging against the assets in the company, usually, property, stocks or debtors;
  • Bank debt – in additional to asset finance, banks will often also provide a cashflow term loan, repayable over 3-5 years to support an MBO;
  • Private Equity (PE) – this in an increasing source of finance even at the smaller end of the market, with many funds looking to back management team to scale their company;
  • Vendor loan notes – if all the above is not enough, often the vendor themselves have to help fund the transition and leave some of their consideration in the company as loan notes to be repaid over time.

So what makes a successful MBO?

  • A company with a good track record of profitability;
  • Good future prospects for the company without high risk factors;
  • A strong committed management team with a mixture of skills;
  • A vendor who is willing to explore a sale to the management team and who will accept a realistic price;
  • A deal structure that can be funded, and supported by the future cashflows of the company.

And what about the risks?

There are a number of risk factors that can make an MBO more difficult.

  • A strong dependence on the owner who is exiting;
  • The impending retirement of other senior management;
  • High customer dependence issues;
  • Market threats such as new competition or new technology.

Such risk factors do not necessarily mean that an MBO is not possible, but they need to be considered from the outset as funders will only provide support if they are satisfied that the company will be viable for the foreseeable future. 

The MBO Process

The key steps of an MBO process include: 

  • Buyer and seller agree on a sale price, possibly including independent valuation;
  • Management team assesses the amount they are able to invest;
  • Detailed financial analysis conducted, including building a forecast financial model to show the serviceability of debt and returns to potential investors;
  • Approach to funders, a small buyout may involve just one funder while in the case of larger transactions, several funders may handle the financing.

The MBO process can take around 6 months, about the same as for a trade sale, so the vendors and management team must be prepared to fully commit to the transaction for that time frame. This can be challenging since the company must be run as normal and kept on track while the transaction is on-going.

A good option to consider…

On balance, an MBO may offer a vendor an attractive alternative to sale to trade. In considering an MBO a number of considerations need to be made such as the desire and credibility of the management team buying the company, the availability of funding and whether all parties involved can agree upon the funding mix. If all the boxes can be ticked the MBO route can provide a vendor with assurance of the future success of their company and the management team with significant opportunity to benefit from future successes. 

If you would like further information and to see how we could help, see our management buyout and buy-in services.