If you are considering a management buyout (MBO), you are likely juggling excitement about the opportunity with questions about the process.
MBOs are a fantastic way to pass ownership to trusted managers, but they require careful planning to succeed.
What is an MBO?
An MBO occurs when a business’s management team purchases the company from its current owners, typically through a mix of funding options.
It is a preferred route for business owners nearing retirement or those who want to ensure continuity by passing the reins to trusted individuals.
MBOs offer advantages over selling to external buyers:
- The management team already understands the business, reducing risk.
- Continuity is preserved for employees and customers.
- Sellers can have confidence in the future leadership of the business.
However, an MBO’s success hinges on thorough preparation and securing the right financial and tax arrangements.
Is an MBO feasible?
Before committing to an MBO, assess whether it is the right approach for your business.
- Does the business’s value match the funding capacity of the management team?
- Can the business generate sufficient cash flow to support debt repayments and future growth?
- Does the management team have the skills to lead and grow the business post-buyout?
Funding an MBO
Securing funding is often the biggest hurdle in an MBO. Here are the most common options:
- Bank loans – Traditional bank funding remains a key source but requires a solid business plan and strong financial forecasts.
- Private equity – Investors may provide funding in exchange for a stake in the business, though this can dilute management control.
- Vendor financing – Current owners may agree to deferred payments, easing the upfront financial burden.
- Personal funds – Some managers contribute personal savings or assets to secure the deal.
Using a variety of these funding options is often required to balance affordability and the business’s stability during the transition.
Tax considerations
Tax planning is an important aspect of MBO preparation, particularly as the current Business Asset Disposal Relief (BADR) landscape may accelerate plans for a sale.
Capital Gains Tax (CGT)
- Under BADR, eligible sellers can pay a reduced CGT rate of 10 per cent on lifetime gains up to £1 million. This rate offers big savings compared to the standard CGT rate of 20 per cent on higher-rate taxpayers.
- With confirmed changes to BADR and CGT, including an increase in the BADR rate from 10 per cent to 14 per cent for disposals made on or after 6 April 2025, sellers may want to act quickly to secure the current tax benefits before the higher rate applies.
Stamp Duty
- Stamp Duty applies to shares purchased, typically at a rate of 0.5 per cent, which needs to be factored into the cost.
Corporation Tax
- The current Corporation Tax rate of up to 25 per cent could impact future cash flow and the business’s ability to repay loans.
Legal and financial groundwork
To ensure a smooth MBO, you’ll need legal and financial expertise to structure the deal.
Key steps include:
- Drafting a share purchase agreement – This defines the terms of the sale, payment structure, and any deferred arrangements.
- Preparing financing agreements – Secure clear terms with lenders or private equity investors.
- Ensuring compliance with employment law – Update employment contracts to reflect new ownership responsibilities and structures.
- Financial due diligence – Buyers and lenders will need reassurance that the business is financially stable and has growth potential.
Building a strong business plan
A comprehensive business plan will be pivotal in securing funding and reassuring stakeholders. Include:
- Detailed financial projections – Show lenders and investors how the business will generate enough cash flow to repay loans.
- Post-MBO strategy – Outline plans for growth, innovation, and operational improvements.
- Risk assessment – Identify challenges and show how you’ll mitigate them, such as retaining key clients or staff.
This plan not only demonstrates your commitment to the business but also reduces lender concerns.
An MBO is a major step for any business, but with proper planning and the right team of advisers, it can provide a seamless transition of ownership and set the business up for long-term success.
Speak to our team today for expert guidance on all aspects of an MBO and to secure the future of your business.