Management Buyout: How an MBO Works, How It's Funded, and What the Owner Actually Gets

A management buyout (MBO) is the sale of a business to the people already running it. The management team sets up a new company, raises the money from a mix of their own savings, bank debt, private equity and, very often, the owner agreeing to be paid part of the price later, and buys the shares. It keeps the business in the hands of people who know it. It also means the owner is usually the one taking the risk on whether they can run it.

This is for owners of established businesses who have a management team good enough to ask the question, and who want to know what an MBO would actually pay them, when, and what could go wrong. I own and invest in businesses and I’ve sat on more than 20 boards, on both sides of deals like this.

How a management buyout works

1. The team makes an approach, or you do. Usually it’s the managing director and two or three senior people.
2. A price is agreed, normally a multiple of adjusted EBITDA, backed by an independent valuation. If you want to see roughly where that lands, the business valuation calculator does the sums.
3. The team forms a new company (“Newco”) which will buy the shares.
4. Newco raises the money (see below) and buys the shares from you.
5. You hand over on completion, or stay on for a handover period, often with part of your price still to come.
6. Newco repays its funders out of the business’s profits over the following years.

The business doesn’t change. Its ownership does, and so does who’s carrying the debt.

How an MBO is funded

Almost no management team has the price in the bank. The money comes from four places, usually in combination:

• The team’s own money. Savings, remortgages, pensions. It’s rarely a large share of the price, but funders want to see it, because it means the team has something to lose.
• Bank debt. Secured on the business’s assets and future cash flow. Banks will lend a multiple of EBITDA, within limits, and they’ll want to see the business can service it comfortably.
• Private equity or an investor. Puts in a chunk of the price for a share of the equity, and usually a seat on the board. Faster, but the team ends up owning less, and the investor wants their return in three to five years.
• The owner: deferred consideration or a vendor loan. You agree to receive part of the price over time, out of profits, sometimes with interest. In a lot of SME buyouts this is the largest piece, because the bank won’t lend enough and the team can’t raise it.

That last one is the bit to understand before anyone opens a spreadsheet. In most MBOs, you become a lender to your own former business, and your return depends on the team you’ve just sold it to.

What the owner actually gets

Say the business is valued at £3m. A realistic structure might be: £300,000 from the team, £1.2m of bank debt, and £1.5m from you, paid over four years from profits. You get £1.5m on completion and the other half if, and when, the business performs.

Three consequences:

1. The timing. Part of your money arrives over years, not on the day.
2. The risk. If the business stumbles, the bank is paid first. You’re behind them.
3. The price. Because you’re carrying risk and funding part of the deal, a well-advised team will ask for a lower price than a cash buyer would pay, and a well-advised owner will ask for interest and security on the deferred part.

Tax matters here too. In 2026/27, Business Asset Disposal Relief taxes the first £1m of lifetime qualifying gains at 18%, with 24% above that, and the lifetime limit is set to halve to £500,000 from 6 April 2027. Deferred payments and earn-outs have their own tax rules. Get the structure right with an accountant before the price, not after.

The one question that decides it

Would you lend this team £1.5m of your own money, unsecured, on a four-year term?

That’s what an MBO with deferred consideration is. If the honest answer is yes, because they already run the business and the numbers are theirs, an MBO can be the best exit there is: a fair price, continuity for the staff and customers, and you leave a business in good hands.

If the answer is no, because the business still runs through you, the decisions still queue at your desk and the team “manage” in title only, then the MBO isn’t an exit. It’s a loan to people who’ve never run a business, secured on a business that doesn’t work without you.

That’s the thing to fix first, and it takes years, not months. A management team that can run the business is worth more to you than any deal structure, because it raises the price for every kind of buyer, not just this one. How to build it: high-performing teams and business succession planning.

MBO, trade sale or employee ownership trust?

• Trade sale: usually the most cash on the day, often the highest price, and the least control over what happens to the business afterwards. Due diligence is thorough and the buyer’s lawyers are good.
• MBO: continuity, a known team, a fair price, but slower money and the owner usually funding part of it.
• Employee ownership trust: sale to all the employees through a trust, 0% capital gains tax if it qualifies, paid from future profits over several years, and you can’t control it afterwards.

The full comparison, and when to start, is in business exit planning.

Before you say yes to your team

1. Get an independent valuation. Not the team’s number, not yours.
2. Run the business’s cash flow with the debt in it. The bank repayments and your deferred payments both come out of the same profit. The 13-week cash flow forecast, ugly version, will tell you if it works.
3. Agree the handover in writing. How long you stay, what you do, what you’re paid for it, and when you stop being asked.
4. Secure the deferred part. Interest, a charge over assets or shares, step-in rights if payments are missed. Friendly deals go wrong when nobody wrote down what happens if they do.
5. Decide what you’re doing next. Owners who sell with no plan drift back in. The team doesn’t want that, and neither does the bank.

Questions owners ask

Do I have to sell 100% in an MBO? No. Some owners keep a minority stake and a board seat, which can also reassure the bank.

How long does a management buyout take? Three to six months from heads of terms to completion is typical, if the funding is available. The preparation, a team that can run it and clean numbers, is the long part.

Can an MBO happen without bank debt? Yes, if the owner is prepared to fund most of it through deferred consideration. That shifts almost all the risk to you, so price it accordingly.

What’s the difference between an MBO and an MBI? In a management buy-in (MBI), an outside manager or team buys the business and comes in to run it. More risk for everyone, because they don’t yet know it.

I’m Dr Lewis Haydon, a business coach and mentor in Birmingham, UK. I own and invest in businesses, and I work with owners of established businesses from about £250k turnover, scaling to £1m and on to £20m, on building the management team that makes an MBO, or any exit, worth doing. If your team has asked the question, bring it to a virtual coffee before you answer them.