A management buyout (MBO) takes place when the existing management team purchases the company they currently operate. Rather than selling to an outside party, the business owner allows trusted senior staff to acquire the business. This often happens when the owner wants to retire, exit the business or unlock liquidity while maintaining continuity within the organisation.
For many business owners, a management buyout offers a logical and seamless exit. The existing management team knows the business inside out, is already invested in its success and can transition smoothly into ownership. For the MBO team, it’s an opportunity to step into leadership, direct company strategy and benefit directly from future growth.
Whether you're a business owner looking to hand over your company to your management team, or a manager keen to take the next step into ownership, this guide is for you.
Why Do Management Buyouts Happen?
There are several reasons why management buyouts occur. Some of the most common reasons include:
- The old owners want to leave the business or retire.
- The parent company wants to sell part of the business it owns, such as a smaller company or division, and let the existing management team take over and run it.
- The management team believes they can do a better job, helping the business to grow.
- The business is undervalued externally, but the management team sees untapped potential and is willing to invest to unlock it.
Whatever the reason, MBOs often come with strategic advantages for both sides. This includes a smooth transition for the seller and a powerful incentive for the management team to drive performance.
How to Finance a Management Buyout
Asset Based Lending
Asset-based lending allows the management team to leverage existing business assets to release capital. This includes machinery, stock, property and unpaid invoices. The assets secure the loan, giving lenders confidence while reducing risk for the MBO team. This approach is particularly useful if the target business has significant physical or financial assets that can be used to fund the purchase price. Some lenders will let businesses use a combination of invoice finance, secured business loans, and asset finance at the same time. This approach helps to release money against multiple assets on a balance sheet, providing the necessary capital for the management team to buy the business.
Secured Business Loans
A secured business loan is one of the most common ways to finance a business acquisition, including a management buyout. Secured loans, in particular, allow you to raise significant funding for a business purchase. These loans are backed by assets, such as commercial or personal property, which the lender can claim if the loan is not repaid.
Invoice Finance
Invoice finance enables the release of funds tied up in unpaid customer invoices. Rather than waiting 30, 60 or 90 days for payments, businesses can receive up to 95% of invoice value within 24 hours. This can help fund the buyout and improve post-acquisition cash flow. This funding route works well for service-based companies or those with large debtor books. It also helps bridge any temporary working capital gaps during the transition period. At Time Finance, we provide flexible management buyout funding solutions tailored to the needs of MBO teams.
How does a Management Buyout Work?
Management buyouts don’t happen overnight. They follow a clear step-by-step process that involves planning, funding, and legal work. Here’s a simple breakdown of how it all comes together:
1. Valuing the business
The first step is to figure out what the business is worth. This valuation sets the sale price and gives both the current owner and the management team a realistic starting point for negotiations. It usually looks at things like profits, regular income, industry trends, and EBITDA (earnings before interest, taxes, depreciation, and amortisation).
2. Doing the due diligence
Once there’s an agreement on price, the management team and potential funders will dig deeper into the background of the business. This is called due diligence. They’ll review the finances, contracts, legal responsibilities, suppliers, and staffing. It’s all about understanding the risks and opportunities.
At the same time, the management team will put together a solid business plan. This includes forecasts, future goals, and how they plan to grow the business once they take over. Funders rely on this plan to decide whether to support the buyout.
3. Securing the funding
With the plan and due diligence done, it’s time to raise the money. This might come from banks, specialist lenders, private equity firms, or a mix of all three. The management team will need to agree on things like repayment terms, interest rates, and how much control investors will have in the business.
It's crucial that both the management team and funders are aligned to ensure the long-term success of the business.
4. Finalising the legal side
Once the funding is secured, the legal work begins. This includes drawing up contracts, transferring shares, and registering the changes with any necessary authorities. If investors are involved, shareholder agreements will also be set up to clarify roles and responsibilities.
At the end of this stage, the management team officially becomes the new owner of the business and takes full control.
Advantages and Disadvantages of a Management Buyout
MBOs offer compelling benefits for both business owners and their management teams but they are not without challenges. Here’s a balanced view:
Advantages of Management Buyouts
Maintain the vision of the business:
An MBO can help ensure that core business values and its culture are upheld. This is because the existing management team already know how to run the business and its objectives.
Smoother transition:
The company maintains its leadership and culture, reducing disruption for employees and customers.
Speed:
Selling a business can usually be a lengthy process. However, an MBO can be a much quicker process because there’s no need to search for buyers.
Disadvantages of Management Buyouts
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.
Financial risk:
Team members without sufficient liquid capital may be forced to use their home or other assets as collateral for funding. If the business fails after the MBO, those assets could be at risk.
Funding challenges:
Businesses often take on debt to finance the buyout, this can significantly impact future cash flow and hinder growth plans.
Management Buyout vs Management Buy-in
A Management Buyout (MBO) is when the company’s incumbent management team purchases the business. In contrast, a Management Buy-In (MBI) occurs when external managers buy into the company, either replacing or supporting the current management team following a change in ownership.
Get Support with your Management Buyout Today
At Time Finance, we can support MBOs and MBIs with our Asset Based Lending solutions. As an independent lender, we work closely with brokers to deliver flexible finance solutions to businesses across the UK. We offer a range of funding options, including Asset Finance, Invoice Finance, Secured Loans, and Multi-Product Solutions.
Speak to our team today and take the first step in your management buyout journey