This article was last updated 0 months ago and may not represent current law.
Are you thinking about selling your business?
Your typical options are:
- Selling to a private third party buyer
- Passing the business to family
- Winding up the business
What is a management buy out?
Management buy outs are used in businesses to buy the existing owners out of a business, but can also be used to separate business departments. MBOs can also happen when an ambitious management team want to take over part or all of the business, or where the current shareholders have decided to exit the business. Reasons for this include retirement or to extract cash out of the business and claim Business Asset Disposal Relief (which used to be called entrepreneurs' relief). That relief is worth less than it was, as the rate has been 18% on up to £1 million of lifetime gains since 6 April 2026, so take advice from your accountant on the tax before you decide.MBOs can happen in any industry with any size of business. Personal resources, seller-financing and private equity financiers are common sources of funding for MBOs.
There are certainly advantages and disadvantages to a management buy out, and this article serves to provide an informed decision if you’re unsure which is the best way forward for your business.
MBO advantages
- You don't have to spend time and effort marketing your business to a third-party buyer
- Easier to agree a value for the business sale
- Contracts and sales processes can be quicker
- You can retain confidentiality around the sale
- Business continuity remains the same
- Warranties and indemnities in the legal sale agreement can potentially be restricted
- Usually more control is retained for the vendor than with a sale to a third-party
- Typically, MBOs stand a higher chance of success and profit than bought by a third-party
- Maintain relationships with key clients and suppliers
MBO disadvantages
- Raising capital to fund an MBO can be a challenge
- A lack of available funding may mean a higher level of deferred consideration is required, placing risk on the vendor
- Potential lack of business ownership experience
- If an MBO does not proceed, this risks damage to the vendor’s relationship with their management team which may have a detrimental effect on the business going forward
Key things to bear in mind
What follows is a list of elements to think about when considering an MBO:- Check the feasibility of the transaction
- Be open and transparent with executives and shareholders
- Whether the transaction will be a share or asset purchase
- Potential income tax liabilities for the new management
- How will an earn-out structure look?
How I can help
Having the right lawyer can make or break an MBO deal. I advise on how the deal is structured, draft and negotiate the sale agreement, and help with the transitional period. I don't value businesses or give tax advice, so the valuation and the tax plan for your exit are for your accountant or corporate finance adviser, and I'll work alongside them.Before the legal work starts, it helps if you and your advisers have:
- An outline of the future business plan and forecast
- A detailed understanding of the company financials, including normalised working capital, normalised profit, cash and debt
- Up to date, fair asset values of any equipment intended to be used in asset finance arrangements
- Impact of any discounts that may need to be applied
- The company’s current debt capacity, if further debt is intended to be used as a source of funding
- Anything that may impact future growth or free cash flows of the business
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
