Management buyouts –what are they & how do I finance one?

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Page written by Rachel Wait. Last reviewed on October 23, 2024. Next review due April 6, 2025.

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Management buyouts can be a popular choice among businesses in any industry, so let’s take a closer look at how they work.

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What is a management buyout?

A management buyout, or MBO, is when a company’s existing management team purchases all or part of the business, often with the help of external financing. In most cases, the management team takes full control and ownership of the business, with the previous owners retiring or moving on to other ventures.

MBOs can be an attractive option for business owners, given that selling a business and finding a buyer can be a lengthy process. The management team already understands how the business operates, ensuring a smoother transition and no disruption to the quality of service.

What are the reasons for an MBO?

The most common reasons for an MBO are:

The old owners want to leave the business
A parent company wishes to divest itself of a business subsidiary or division
The company is in trouble or has gone into receivership, but still has potential
The management team believes they can do a better job, helping the business to grow.

How does a management buyout (MBO) work?

MBOs can be a complex process, and require the input of lawyers, analysts and accountants, as well as the support of funders, lenders and possibly equity investors.

From start to finish, an MBO works like this:

Management team is prepared: This is the team agreeing to buy the business and could include the current managing director, finance director, sales director and operations director.
Business plan is developed: The management team needs to prepare a business plan and strategy to implement once the buyout is complete.
Finance options are assessed: The management team must assess the amount they can invest. This is often from personal assets, but further funding is usually required.
Financial analysis is carried out: Assessing the company’s financial health and obligations can help determine the appropriate valuation.
Sale price is agreed: This must be done between the seller and the buyer and may require an independent valuation.
Funders are approached: This provides the cash to complete the sale.
Transaction completes: The management team takes control of the business.

Andrea Reynolds
Swoop’s CEO & Co-Founder

A word from Andrea

"The Swiss army knife of finance tools, a management buyout offers total flexibility in the purchase of a business by its existing management team. In most cases, the management team takes full control and ownership of the business, with the previous owners retiring or moving on to other ventures."

Who funds a management buyout?

The management team must typically stump up some of their own funds, but as this is unlikely to stretch far enough, further funds often come from third parties. This can include bank loans, private equity investment and venture capital.

Swoop’s funding resources can provide the expertise and advice you require to complete your MBO. Register with us to discover which funding routes are best for your transaction.

How do I finance an MBO?

The most popular financing options include:

Private loan

Members of the buyout team can use secured and unsecured personal loans to fund the MBO. These enable you to borrow a lump sum that you then repay in monthly instalments, with added interest, over a set term.

Secured loans require the use of assets, such as property, as collateral and these could be at risk should the business fail after the MBO. Unsecured loans don’t require collateral but borrowing amounts are typically smaller and the loan must be repaid over a shorter timeframe – usually up to five years.

Business loan

It’s also possible to apply for a business loan from a bank or finance provider. Depending on the type of business being purchased, unsecured lending may be possible, but again, borrowing amounts are usually much smaller than secured lending.

Private equity (PE)

If a bank is reluctant to lend, the buyout team could also look to private equity funds. These can lend capital in exchange for shares, board seats, dividends, and varying degrees of control. Cash can be provided by individuals or private equity firms. Private equity firms will be looking to make a strong return on their investment, and many will have an exit strategy in three to five years. You may need to find replacement funds at this point.

Mezzanine finance

Mezzanine finance is a hybrid of debt and equity financing and enables you to bridge the gap between the funds you’ve raised and the company’s purchase price.

Seller loan

A seller or vendor loan is where the seller helps to fund the transaction by leaving some of their consideration in the company as loan notes to be repaid over time. In effect, their ownership reduces over an extended period. The old owner may retain a degree of control until they are completely paid out.

What are the advantages of an MBO?

Pros

Smoother transition: An MBO means less disruption for employees, customers and operations. The management team already knows how the company operates and will also be aware of any areas requiring improvement.
Quicker sale: An MBO can be a much quicker process - there’s no need to search for buyers and the management team will usually be familiar with the company’s health, reducing the due diligence.
Protects sensitive information: In a trade sale, potential buyers will demand to see the internal workings of the company and sellers may need to disclose sensitive or proprietary information. This can leave them vulnerable to copycat operators.
Maintain the vision of the business: It can be hard for founders to step away from their business. However, an MBO can help ensure that core business values and its culture are upheld.

What are the disadvantages?

Cons

Buyout team required to invest: Team members without sufficient liquid capital may be forced to use their home, pension pot or other assets as collateral for a loan. If the business fails after MBO, those assets could be at risk.
Can be harder to get financing: Funders may determine that the strengths of the remaining management team are insufficient to drive the company forwards.
Business often takes on debt to finance the buyout: This can significantly impact future cash flow.
Transition can be challenging for management: The transition from a managerial to an entrepreneurial position can be challenging for some buyout teams. This may create stresses that negatively affect the growth of the business.

What’s the difference between a leveraged buyout (LBO) and MBO?

A leveraged buyout (LBO) is similar to an MBO, but while an MBO is typically financed through a combination of the management team’s own funds and financing from third parties, LBOs are usually predominantly financed by borrowing funds and taking on debt.

In an LBO, the company’s assets are sold or pledged as collateral to raise funds for the purchase. This can enable a group of buyers to purchase a company that’s worth more than their spending power.

While the management team takes on risk by investing their own money through an MBO, with an LBO, there’s a risk of taking on too much debt which could become difficult to repay.

What’s the difference between MBI, MBO, and BIMBO?

With an MBO, the current management team buys the business.
With an MBI (management buy-in), a new management is brought in to acquire the business.
With a BIMBO (buy-in management buyout), both the existing and new management buy the business together.

MBIs are different to simple trade sales because a brand-new management team is put in place. In a trade sale, a buyer purchases the business but often leaves the existing management team intact. Management buy-in teams often compete with other potential purchasers for the business, which means the outgoing owners could get a better sale price.

A BIMBO incorporates elements of both an MBO and an MBI, with outside managers joining with exiting inside manages to buy the company together. A BIMBO can reduce the amount of external borrowing required, as the pool of purchasers is increased. It can also bring in new talent that enhances the business proposition to potential funders.

Should I use an MBO, LBO, or MBI?

If you’re selling a business, whether you should use an MBO, LBO or MBI depends on your situation and your goals. If you’re keen for a quick takeover and you wish to keep the existing management team in place, an MBO or LBO will likely be most suitable.

On the other hand, if you’d prefer to get a better sale price or you’d rather a new management team took over, an MBI might be more appropriate.

If you’re feeling confused, our pool of experienced lenders can advise you on the most appropriate form of funding for your transaction. Register with Swoop to find out more.

Management buyout examples in the UK

Management buyouts are popular in the UK, with some examples outlined below:

Cheshire-based apprenticeship training provider Instep, completed a management buyout that saw its senior management team comprising of CEO Andy Murphy and corporate services director Leanne Gagic, acquiring equity in the business. Instep delivers specialist training to giants such as AO, Vodafone and ASOS.
Swindon-based independent specialist staffing firm Outsource UK announced it had completed a successful management buy-out. The transaction saw Founder and Chairman Paul Jameson exit the business, selling the company to CEO Nick Dettmar.
Scottish commercial decorating contractor Bell Group completed a management buy-out and will target acquisitions under its new leadership. The MBO was backed by a seven-figure bank loan.
Grower of trees and shrubs, commercial nursery Deepdale, announced the completion of a management buyout to enhance the company’s EU expansion.
Soft drinks manufacturer, Corinthian Brands joint managing directors John Hibberd and Paul Burton led a management buyout (MBO) of parent company St Helier Beverage Company, with help from an eight-figure funding package from finance lenders.
With support from external financiers, Sagacity Solutions, a provider of tech-enabled customer data management solutions, completed a management buyout led by the founders of the business, Anita Dougall, Malka Townshend, and Harry Dougall.

What are the tax implications of a management buyout?

Before proceeding with a management buyout, it’s crucial to understand the tax implications.

These will vary depending on the structure of the MBO, but Capital Gains Tax is one to watch out for. This is a taxation on the profit you make when you sell an asset, and shareholders and founders will likely need to pay this. However, business owners may pay a reduced rate thanks to Business Asset Disposal Relief.

Also be aware that if the management team applies for a business loan to finance the acquisition, the interest payments are tax deductible, so it can be worth seeking tax advice.

Register with Swoop to discuss your MBO structure before you finalise the purchase with the seller. Your potential tax savings could be significant.

What are the alternatives to an MBO?

If you’re an owner wishing to exit your business and an MBO isn’t suitable, other options include:

Trade sale: This is a direct sale to a third party, often a competitor in the same sector.
Family transfer: This can be a popular choice for family-run businesses.
External management introduction: New management is hired to take on the day-to-day running of the business, but you retain ownership and ultimate control.
Stock market float: The business offers shares to buyers via an IPO. You sell your shares, and the stockholders hire a new management team.

Another option is an employee buyout. This is where all employees, not just the management, come together to buy the business. They can then own the business directly or indirectly – or through a hybrid model that combines the two.

With indirect ownership, employees set up a trust that holds shares on behalf of the employees and these will be used to their benefit. Employee Ownership Trusts are the most common form of trust. It can be a suitable option if your business has a lot of employees or a higher staff turnover.

With direct ownership, employees hold shares in their own names and could receive financial rewards such as dividends. It can give employees a stronger sense of ownership and boost employee retention.

How do I apply for MBO finance?

If you want to apply for MBO finance, it’s worth seeking legal, financial and tax advice first. You can also register with Swoop today for confidential advice on the option that would work best for you.

Written by

Rachel Wait

Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

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