Management buyouts: what happens when your own team buys the business

A management buyout is when the people already running your business buy it from you. No competitors reading your books, no stranger learning the trade, familiar faces on the Monday after settlement.

It is usually described as the gentle option, and for a lot of owners it is the one they would prefer.

The part worth understanding is that an MBO tells you the truth about your business earlier than any other sale. Lenders back these deals because the buyers already know how the place works. If that knowledge sits with you rather than with your team, there is nothing for a lender to back, and the gap gets filled by you carrying part of the price yourself.

Wanting to buy it is the easy part. Whether they already run it is the question.

What is a management buyout?

Your management team acquires all or part of the business they currently manage. They put in some of their own money, and the rest comes from a mix of borrowing and, often, from you.

Owners choose this route for reasons that have nothing to do with price. You do not have to open your accounts to a competitor. The pool of trade buyers for a specialist business can be small. And a lot of owners want to know the staff and the customers will still be looked after once they are gone.

Those are good reasons. They are also the reasons owners talk themselves into an MBO before checking whether the funding can be built.

How long does a management buyout take?

Commonly six to twelve months from the first real conversation to settlement, and the published estimates vary, with some putting a straightforward deal at closer to six.

The funding is almost always the slowest part. Your managers need a business plan a lender will accept, an independent view of the price, and their own money on the table. Lawyers and accountants on both sides then have to document a transaction where the buyer and the seller have worked together for years, which is its own kind of awkward.

What shortens it is preparation that happened before anyone raised the subject. Financials a lender can read without a translator. Contracts and leases in writing. A team who can describe how the business runs without checking with you first.

What is the difference between MBO and LBO?

They answer different questions. An MBO is about who is buying: the existing management team. A leveraged buyout is about how it is paid for: mostly borrowed money, and the buyer can be anyone.

The two overlap constantly. Most management buyouts are funded largely with debt, which makes them leveraged buyouts as well. When people say leveraged MBO, they mean one weighted more heavily to borrowing than to the team's own equity.

The reason it matters to you is that debt has to be serviced out of trading afterwards. A business loaded with borrowing on the day you leave has very little room if the first year goes badly, and the first year is exactly when your absence gets tested.

How a management buyout gets funded

Usually four sources stacked together.

• The team's own money. Lenders expect it, and treat it as the measure of how committed the managers are. In smaller deals this often means selling assets or borrowing against the family home.
• Senior bank debt, secured against the business and its assets.
• Vendor finance, also called a seller note. You leave part of the price in the business, repaid over a period of years.
• Outside equity, from a private equity firm or a family office, in exchange for a shareholding.

Two of those four are worth sitting with. Your managers may be remortgaging their houses to buy the business. And you may be lending them a chunk of the purchase price, repaid out of the performance of a business you are no longer running.

Why the funding tells you the truth

Lenders are generally more comfortable with an MBO than with an outside acquisition, because the buyers already know the customer relationships, the supplier terms and where the weak points are. Less unknown means less risk to underwrite.

Read that from where you sit. The lender is pricing how much your team knows. Not how much you know.

If the pricing calls, the key accounts and the decisions that hold the business together all run through you, your managers cannot demonstrate to a lender that they can carry it. The bank lends less. The shortfall has to come from somewhere, and the somewhere is usually you, through a bigger seller note, held longer, at more risk.

That is the same trade a buyer offers when they propose an earn-out, arriving by a different road. The more the business depends on you, the less of your money you get at settlement, and the longer you stay exposed to a business you have handed over.

Is a management buyout a good thing?

For the right business, it is one of the cleanest ways to step back. Continuity for staff and customers, no confidential information leaving the building, and a buyer who does not need six months to understand what they have bought.

For a business that runs through one person, it is the hardest of all the options, because the buyers are the very people who would have to absorb that person's job. An outside buyer can bring in their own managing director. Your team cannot bring in anyone. They are already the answer, or there is no answer.

Which is why the conversation is worth having early, and honestly. If you asked your two or three senior people today whether they would put their own money into buying this business, their answer would tell you more about how sellable it is than any valuation.

A no there says nothing about your managers. It describes how the business is currently built, and a trade buyer would arrive at the same description more slowly and price it more harshly. our guide to how a sale works covers what that pricing looks like from the other side.

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