Management buyouts explained: selling to your own team

01

What a management buyout is

A management buyout, or MBO, is the sale of a business to its existing managers. The British Business Bank’s guide to private equity puts it simply: when the company’s existing management is the buyer, the transaction is referred to as a management buyout. It describes a buyout as the purchase of a majority stake in a company, gaining control over its day-to-day operations.

A management buy-in, or MBI, is the same idea with outsiders: an external team buys the business and takes over its leadership. Some deals combine the two, with existing managers joined by one or more new leaders.

For a founder, the appeal is continuity. The buyers already know the business, its customers and its people, and the handover can be gentler than a sale to a stranger. For the managers, it is the chance to own what they help to run.

SCALE2SELL® pillar 08Exit Readiness

02

When a buyout fits

A buyout tends to suit founders who care about what happens to the business after they leave, and businesses with a capable team already in place. It is worth exploring when:

• there is a management team that runs the business day to day, not just a set of capable individuals
• at least some of those managers want to own the business, and to carry the risk that comes with it
• the business has steady, well-evidenced profits and cash flow that could support borrowing or investment
• you want continuity for your staff, your customers and the culture you built
• you are open to receiving part of the price over time, if the funding requires it.

If those conditions are not in place yet, a buyout is not ruled out. It is a reason to start preparing early. Building the team is a leadership question long before it is a funding one: see Team & Leadership.

03

How buyouts are funded

Funding is usually the central challenge. Managers rarely have enough capital to buy a business outright. Management buyouts are often funded using a combination of several sources:

• The managers’ own money, which shows commitment, and which other funders usually expect to see.
• Lenders, whose loans are repaid from the business’s future profits and cash flow.
• Investors, often private equity, who take a share of the business in return for capital. The British Business Bank notes that private equity investments are commonly used to aid management buyouts and buy-ins in established companies, and that when an acquisition is largely financed through borrowed funds it is known as a leveraged buyout.
• The seller, through part of the price being paid after completion. Payments like this are often called deferred consideration or vendor finance.

Each source brings its own conditions. Lenders and investors will examine the business closely before committing, and investors will expect a say in how it is run. The British Business Bank describes private equity investors seeking out companies led by high-quality management teams with a plausible strategy for expansion, and notes that they will expect board seats.

04

How a buyout usually unfolds

Every buyout differs in the detail, but the broad sequence is predictable.

Throughout, the managers are in an unusual position: they are negotiating to buy the business while still running it for you. Agreeing early how that will be handled, and who advises whom, protects the relationship and the business. In a private equity deal, the British Business Bank notes, the seller and the investors each hire their own lawyers to check the sale is properly documented.

05

Price, payment and your protection

In a sale to an outside buyer, much of the price may be paid on completion. In a buyout, more of it often depends on the future, because the managers are funding the purchase partly from the business they are buying.

That raises questions to settle with your advisers before you agree terms:

• How much will you receive on completion, and how much later?
• What happens to the deferred amount if the business struggles, and what security do you have?
• Will you keep a shareholding, and with what rights?
• What restrictions, such as not competing with the business, will apply to you afterwards?

The British Business Bank’s guide to selling your business explains that an acquirer will typically value a company by a multiple of normalised earnings or by discounted cash flows, and that both calculations rest on assumptions and projections. In a buyout, those projections are also the managers’ plan for repaying their funders, so it pays to test them together. Stratworth does not provide formal business valuations. We help founders understand and strengthen the drivers that can influence value; formal valuation and transaction advice should come from the appropriate professional advisers.

06

What can go wrong

• The team is not ready. Good managers are not always ready to be owners. Owning a business means carrying risk, raising money and making the final decision.
• The funding does not stretch. If the business cannot support the debt or the investors’ expectations, the deal stalls, or it completes and then strains the business.
• The relationship suffers. Negotiating with people who work for you can strain trust on both sides. Clear roles and separate advisers help.
• Performance dips during the process. Managers absorbed in the deal are not running the business, and a dip gives funders reason to pause.
• Too much of the price depends on the future. If you rely on deferred payments, your outcome depends on decisions you no longer control.

A buyout is a leadership question long before it is a funding one.

07

Tax and legal points to raise early

How a buyout is structured has tax consequences for you and for the business, and those depend on detailed conditions that change over time. We state no rates or reliefs. GOV.UK sets out the background in its guides to Capital Gains Tax for business and Business Asset Disposal Relief, and HMRC’s guidance on selling or closing your company explains how selling the shares in a company differs from the company selling its assets.

Think about your employees from the start. When a business changes owner, employees may be protected under the TUPE regulations on some kinds of sale. GOV.UK’s guide to business transfers, takeovers and TUPE explains when it applies, and GOV.UK’s responsibilities when selling a limited company covers practical steps such as appointing new directors and telling Companies House.

08

How to prepare for a buyout

Most of the preparation for a buyout is the same as for any exit, with extra weight on the team:

1. Develop the team before the deal. Hand over decisions, relationships and responsibility, so the managers have run the business before they buy it.
2. Strengthen the numbers. Lenders and investors will rely on your management accounts, forecasts and cash flow. See Financial Clarity & Drivers.
3. Reduce dependence on you. Funders want to see that the business works without its founder. See How to make your business less dependent on you.
4. Prepare for due diligence. Records, contracts and ownership in order. Our guide to due diligence sets out what is usually examined.
5. Decide what you need. Your walk-away number, how much you could accept over time, and your role afterwards.

SCALE2SELL® prepares the business, and its leadership team, for a buyout as for any exit. We work alongside your accountant, tax adviser and solicitor; we do not arrange funding, act for either side in the transaction, or give legal, tax or investment advice. Book a complimentary Founder Conversation with Nik to talk through whether a buyout suits you, or read Exit routes explained to compare it with the alternatives.