Management buyout finance

In a management buyout, the people who run a business buy it from its owners through a new company formed for the purpose. The price is funded by senior debt secured on the business, money the seller accepts later as deferred consideration or loan notes, the managers’ own stake and, on larger deals, private equity. The debt is repaid from the profits of the business being bought.

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How a management buyout works

The managers set up a new company, known as a newco, which agrees to buy the shares of the trading company from its owners. The managers subscribe for shares in the newco, the lenders lend to it, and the seller may accept part of the price later. Once the purchase completes, the trading company is a subsidiary of the newco, and its profits pass up as dividends to repay the newco’s debts.

The managers put in their own money, but what they can raise is small against the price, so debt and the seller’s deferred money fund the rest. That leaves the business heavily geared. It has to support repayments it did not have before, at the same time as it loses an owner who may have held key relationships.

A buyout suits a business with steady profits and cash flow, a team that already runs it day to day, and an owner who wants to sell to people they know. A management buy-in uses the same structure with an outside team buying in, and lenders look harder at a team that has not run that business before.

How a buyout is put together

  1. 1

    Agree price and terms

    The managers and the owners agree the price, how much is paid at completion and how much later, in heads of terms.

  2. 2

    Form the new company

    The managers incorporate the buying company and agree who holds what share and who leads, in a shareholders’ agreement.

  3. 3

    Raise the funding

    Senior lenders, any private equity investor and the seller agree their parts after reviewing the forecast, due diligence and the team.

  4. 4

    Complete

    The newco buys the shares, the lenders register their charges, and the seller’s deferred money is documented as loan notes or deferred consideration.

Can the business carry the debt?

Illustrative example

A management team buys a company for an assumed £3m. A senior lender offers £1.5m over five years at an assumed 9% a year. The seller takes a vendor loan of £1.2m and the managers put in £300,000. The company generates an assumed £560,000 a year of operating cash flow before debt repayments.

Senior loan
£1,500,000
Monthly repayment
£31,137.53
Annual repayment
£373,650.36
Operating cash flow a year
£560,000.00
Debt service cover
1.50 times
Cash left each year after the senior loan
£186,349.64

Vendor loan repayments, capital spending and anything the managers draw all come out of that £186,349.64. Run your own figures through the debt service cover calculator.

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The seller’s part in a buyout

The seller funds part of the deal by accepting part of the price later, as deferred consideration or as loan notes issued by the newco. The senior lender will require those loan notes to rank behind its own loan, and will want an agreement that the seller is paid only while the senior loan is up to date.

That makes the seller a creditor of the business they sold, relying on the managers to keep it profitable. If trading falls, the seller’s deferred money is at risk before the bank’s. Sellers ask for security, interest on the loan notes, and information rights until they are paid in full.

The tax needs planning too. When tax on deferred consideration falls due depends on how the deferral is structured, and Business Asset Disposal Relief can apply to qualifying gains. Selling your business and how much tax you will pay on a sale cover the personal side, including investing the proceeds.

Funding a buyout with and without private equity

Debt and vendor fundedWith private equity
Who owns the business afterwardsThe managers own all or nearly all the sharesThe investor takes a large stake, sometimes a majority
Size of dealLimited by what the cash flow and the seller will supportLarger deals, with investor money alongside the debt
CostInterest on the senior loan and the loan notesThe investor’s share of the value when it sells, and interest on any investor loan notes
ControlThe managers, within the lender’s covenantsA board seat for the investor, consent rights over major decisions
ExitNo set dateThe investor expects a sale or refinancing at a planned point

See growth capital and equity investment for how investors price a stake.

Personal guarantees and the managers’ own money

Senior lenders can ask the managers for personal guarantees, on top of security over the newco and the trading company. A guarantee from a manager whose own money is already in the deal doubles that manager’s exposure. Negotiate a cap that reflects what each manager can afford to lose, and an agreed date or condition for release. What a personal guarantee means for a director covers the detail.

Managers fund their stake from savings or, in some deals, by borrowing against their homes. Borrowing personally to buy shares in a geared company puts the family home behind the business twice over. Take independent advice before you do it, and understand what you lose if the business fails.

Protect the deal against the loss of a key person. If one of the managers dies or falls seriously ill, the business loses their skills and the others may need money to buy their shares. Business protection covers key person and shareholder protection, and a relevant life policy gives each manager death-in-service cover paid for by the company.

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Questions people ask

How is a management buyout funded?

Through a new company the managers set up. It borrows senior debt secured on the business, the seller leaves part of the price in as deferred consideration or loan notes, the managers put in their own money, and on larger deals a private equity investor buys shares. The trading company’s profits repay the debt after completion.

Do managers need to put their own money into a buyout?

Lenders and investors expect them to, because money at risk commits the team to the deal. There is no fixed amount; it is negotiated as part of the structure, and private equity investors often set it in relation to each manager’s means. Borrowing against your home to fund it adds personal risk, so take advice first.

What is a vendor loan note?

A vendor loan note is a written promise by the buying company to pay the seller part of the price later, with or without interest. It ranks behind the senior lender, which will restrict repayments if the senior loan falls behind. The seller is relying on the business performing under its new owners to be paid in full.

What is the difference between a management buyout and a management buy-in?

In a buyout the existing managers buy the business they already run. In a buy-in an outside team buys it and takes over management. The funding structure is the same, but a buy-in team does not know the business from the inside, so lenders and investors carry out more due diligence and may ask for a larger stake from the team.

Can a management buyout be done without private equity?

Yes, if the business generates enough cash to repay senior debt and the seller is willing to defer a large part of the price. The managers keep all or nearly all the shares, and the deal is limited by what the cash flow can support. Private equity makes larger deals possible but takes a stake and a say in how the business is run.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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