Management buyout finance: how to fund an MBO
By Raphael Ramani, Acquisition Finance Specialist · Last reviewed
A management buyout (MBO) is when the people who already run a business buy it from its owner.
For the owner, it's a way to retire, step back or realise the value they've built, while keeping the business in hands they trust. For the managers, it's the step from running the business to owning it, with a head start no outside buyer has: they already know the customers, suppliers, staff and numbers.
Whether you're an owner considering selling to your team, or a manager thinking of buying the business you work in, this guide explains how an MBO works, how it's financed across the UK and the costs to plan for.
What is a management buyout?
In an MBO, the existing management team buys the business instead of an outside buyer. Continuity is the main attraction: customers, staff and suppliers deal with familiar faces, and the new owners don't have to learn the business from scratch.
Owning a business is still a different job from managing one. The team takes on responsibility for its future performance and for the borrowing used to buy it.
A management buy-in (MBI) is the same idea with outside managers buying in. Many of the financing principles below apply to both.
What lenders want to see in the team
- Commitment. Every manager is ready to become a director and shareholder, and to put in their own money.
- Chemistry. The team agrees on the direction of the business and can make decisions together as owners.
- A full set of skills. Between them, the team covers sales and customers, operations, and finance. A gap in finance, in particular, is a common lender concern.
The MBO process, step by step
Every MBO is different, but most follow these stages. Allow 2 to 6 months from first conversation to completion.
1. Approach the owner and agree terms in principle. Agree a price and the outline of the deal. Until completion, you are still employees: keep the discussions confidential and don't use company information or time in ways your employer hasn't agreed to. Take legal advice early on your duties as managers.
2. Value the business. Agree what it's worth, usually as a multiple of maintainable profit. A lender may ask for an independent valuation. Our guide to valuing a small business explains how this works.
3. Due diligence and the business plan. Even though you know the business, formal due diligence protects you and your lender. It covers:
- accounts and financial performance
- customer and supplier contracts
- employees and employment obligations
- property and lease arrangements
- existing borrowing and liabilities
- legal and regulatory matters
- assets and equipment
Alongside it, prepare a business plan with realistic projections showing how the business will trade and repay its borrowing under your ownership.
4. Structure and secure the finance. Combine your own contribution, lender funding and any seller finance into a structure the business can comfortably repay. Lenders assess the same six factors as any acquisition: see the iLendi Six™.
5. Legal work and completion. Solicitors draft the purchase agreement, warranties and finance documents, and handle any landlord or third-party consents. The management team also signs a shareholders' agreement between themselves, setting out who owns what, how decisions are made and what happens if someone leaves.
6. Completion. The new company (NewCo) completes the purchase, and the managers become its shareholders and directors.
How an MBO is structured
The management team usually sets up a new company, often called a NewCo or special purpose vehicle (SPV), to make the purchase. The managers own the NewCo's shares, and the acquisition finance is raised through it.
Share purchase or asset purchase
- Share purchase (the usual route). The NewCo buys the shares of the existing company. The company carries on as before, with its contracts, staff, history and liabilities. Due diligence matters more here, because past liabilities come with the company.
- Asset purchase. The NewCo buys the business and its assets, such as goodwill, equipment and stock, but not the company itself. Contracts need transferring to the NewCo, and employees transfer automatically under TUPE.
The choice affects tax, risk and what lenders can take as security. Your solicitor and accountant will advise which suits the deal. The business acquisition finance guide covers both routes.
Full or partial MBO
- Full MBO. The team buys the whole business and the owner exits at completion.
- Partial MBO. The team buys part of the business and the owner keeps a stake. This suits an owner who wants to step back gradually rather than sell everything at once.
Common pitfalls
- Overpaying. The price should reflect the business's current maintainable profit, not hoped-for future growth.
- Too much debt. Repayments must leave the business enough cash to trade comfortably, including in a weaker year.
- No real business plan. A plan with realistic projections is what convinces a lender, and it keeps the team aligned after completion.
How an MBO is financed
Most MBOs combine several sources of money. The right mix depends on the price, the business's profit and assets, and how much borrowing it can comfortably repay.
The management team's contribution
Lenders expect the team to put in some of their own money, typically 10% to 30% of the price. It shows commitment and gives everyone a real stake.
Term loans
A business acquisition loan, repaid over an agreed term, usually forms the core of the funding. The amount depends on the business's profit and the lender's assessment.
Government-backed loans (Growth Guarantee Scheme)
Where a lender would otherwise lend less or ask for more security, the Growth Guarantee Scheme can help. The government guarantees 70% of the loan to the lender, with facilities up to £2 million per business group. You remain fully responsible for repaying it. iLendi Capital specialises in these facilities; see what government-backed loans are.
Borrowing against property
If the business owns its premises, a commercial mortgage secured on the property can raise part of the purchase price.
Asset-based lending and invoice finance
Where the business has valuable stock, plant and machinery, asset-based lending can release funds against them. If it sells to business customers on credit, invoice finance can release cash tied up in unpaid invoices.
Seller (vendor) finance
The owner agrees to receive part of the price after completion, paid over an agreed period. This is common in MBOs because the owner knows and trusts the team, and it typically covers 20% to 45% of the price. The main lender will need to agree the terms, as they usually rank behind its loan.
Earn-out
Part of the price is paid later only if the business hits agreed targets, such as profit over the next two years. An earn-out helps when the owner and team disagree on the value: the owner gets the higher price if the business performs.
Private equity or mezzanine finance
For larger deals, private equity or mezzanine finance can fill a gap that loans and the team's contribution can't. It usually costs more, and private equity investors take a share of the business.
Personal guarantees
Lenders commonly ask the managers for personal guarantees on part of the borrowing. Understand what you are signing and take independent legal advice.
The costs of an MBO
The purchase price is only part of what you need. Budget for these as well:
- Valuation. An independent view of the price, often required by the lender.
- Due diligence. Accountants' and solicitors' review of the business before you commit.
- Legal fees. The purchase agreement, warranties, finance documents, shareholders' agreement, consents and setting up the NewCo.
- Tax advice. How to structure the deal for the team, the NewCo and the seller.
- Stamp duty. On a share purchase, stamp duty is charged on the shares, at 0.5% of the price; check the exact amount with your accountant. On an asset purchase that includes property, Stamp Duty Land Tax applies to the property instead.
- Finance costs. Lender arrangement fees, the lender's valuation and its legal costs.
What about the property?
If the business trades from leased premises, allow for landlord's consent, legal costs on the lease, any rent deposit and repair obligations. See the costs of buying a leasehold business.
If the business owns its property, allow for a property valuation, building survey and any repair or refurbishment work. See the costs of buying a freehold business.
Working capital: the golden rule
Don't put every available pound into the purchase. The business still needs cash to trade normally from the day you take over. Allow for:
- wages and suppliers
- rent, service charges and utilities
- stock
- tax and insurance
- a contingency for the unexpected
How much you need depends on the business's trading cycle and payment terms. Read why buyers run out of cash before you set your budget.
MBO finance: your questions answered
How much do the managers need to put in?
Lenders usually expect the team to contribute 10% to 30% of the purchase price, depending on the business's profit, its assets and any seller finance. Read how much deposit you need.
Can we use a government-backed loan for an MBO?
Yes. The Growth Guarantee Scheme can support the purchase of a business, including an MBO, through an accredited lender, with facilities up to £2 million per business group. The lender still assesses the deal, and you remain responsible for repaying the loan.
What if we can't raise the full price?
The gap is often closed with seller finance, where the owner is paid part of the price over time, or an earn-out linked to future performance. A government-backed loan can also help where a lender would otherwise offer less.
Will we have to give personal guarantees?
Often, for at least part of the borrowing. It depends on the lender, the security available and the type of facility. Take independent legal advice before signing one.
How long does an MBO take?
Usually 2 to 6 months from first conversation to completion. Agreeing the price and due diligence usually take longest. Indicative finance terms are usually available within 48 hours of your enquiry.
Can the owner stay involved?
Yes. In a partial MBO the owner keeps a share of the business. In a full MBO, the owner can still agree to stay on for a handover period, which can reassure a lender.
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