A management buyout (MBO) is a transaction in which the existing management team purchases the business from the current owner, typically with backing from private equity and/or bank debt. For the selling owner, an MBO offers continuity. The people who understand and care about the business become its new owners. For the management team, it is the opportunity to build personal wealth in a business they already know.
The management team does not need to fund the acquisition from their own savings. In a typical MBO structure, the team puts in a relatively small amount of personal capital (enough to demonstrate commitment) and the rest comes from a PE investor and senior bank debt. The team's equity stake. Usually 10 to 20% of the business. Is where the financial upside lies.
How is an MBO financed?
The capital structure varies depending on deal size, but typically:
| Source of capital | Typical proportion |
|---|---|
| Senior bank debt | 40 to 60% of enterprise value |
| PE equity | 25 to 45% of enterprise value |
| Management equity | 5 to 15% of enterprise value |
| Seller loan notes (deferred consideration) | 0 to 10% |
The PE firm's equity comes with governance requirements. Regular board reporting, financial targets, a planned exit in three to five years. This is the main constraint an MBO places on the management team: they will be answerable to an investor, not just to themselves.
What size of business suits an MBO?
MBOs work best for businesses with:
- EBITDA of £750k or above (below this, PE backing is difficult to secure; lower mid-market PE firms typically target £1m+ EBITDA)
- A capable management team of at least two or three senior people beyond the owner
- A stable, profitable trading history. Lenders need visibility on debt service
- A clear growth plan that the management team can articulate and believe in
The management team needs to be able to run the business credibly without the founder. If the business is entirely dependent on the owner, an MBO is not viable.
The process from the seller's perspective
- Owner indicates intention to sell and discusses options with a corporate finance adviser
- Management team is informed (timing is a judgment call. Usually before a broad market process begins)
- Management team appoints their own adviser (separate from the seller's adviser. Different interests)
- Management team prepares their business plan and approaches PE firms
- Seller and management team agree a price and structure
- PE firm conducts due diligence; legal documentation drafted and agreed
- Completion
The seller's primary negotiation is on price and the warranty package. The promises made in the sale agreement about the state of the business. MBO buyers typically push hard on warranties because they have limited resources to pursue claims compared to a large trade buyer.
Frequently asked questions
Will my management team be able to raise PE backing? It depends on the business. Primarily on EBITDA, growth trajectory, and the credibility of the management team. Most PE firms want to back a team of at least two senior people with genuine operational authority. A business where one person holds all the key relationships and knowledge is harder to back on an MBO basis.
Should I approach a PE firm directly on behalf of my management team? No. The management team should appoint their own adviser and approach PE independently. The seller and management team have different interests in the negotiation. The seller wants the highest price, the management team wants the lowest. They need separate representation.
What warranties will I be asked to give on an MBO? Warranties are contractual promises about the state of the business at completion. That accounts are accurate, that contracts are in place, that there are no undisclosed liabilities. MBO buyers typically ask for the same warranty package as a trade buyer. Negotiate hard on the scope and financial cap on warranty claims.
Is an MBO faster than a trade sale? Sometimes. An MBO avoids the need to market the business to multiple buyers, which can shorten the timeline. But PE due diligence is rigorous, and management teams often take longer than expected to secure backing. A well-run trade sale process with a single preferred buyer can complete as quickly as an MBO.
What happens if the MBO team cannot raise the financing? The process collapses and the seller needs an alternative approach. Either a broader market process or a different route. This is one of the risks of an MBO-first approach. Many advisers recommend running a light parallel process so the seller is not solely reliant on the management team succeeding.