A business's management team might want to buy the business from its current owners. This is known as a 'management buy-out' or 'MBO'.
Management buy-outs happen for a variety of reasons, including:
- the owner wanting to sell shares in their business
- the owner planning to sell or retire from their business
- to create a new business out of part of the existing business (a 'subsidiary' or 'spin off')
- the management team wanting to buy the business they work for
- saving the business from closure
The management team could buy the entire business or part of it.
If you're part of a management team who are thinking about buying a business, you need to do the following things:
1. Write a business plan
You'll need to write a business plan that shows things like:
- your valuation of the business
- how you've planned your finances (financial projections)
- how you intend to fund the buy out
- what you're going to do with the business
In particular, you'll need to show that the business can keep running by:
- making enough profit
- managing your cashflow
- having money (working capital) to fund the business, for example to buy stock
- paying any debts
2. Agree terms and conditions with the seller
You'll then need to agree terms and conditions with the seller (or 'vendor'). This will include agreeing:
- the valuation
- how you'll make payments (for example, paying part of the money upfront and the rest in instalments)
- when you'll make payments
- the date you intend to complete the sale by
- how long the deal will be exclusive to you
The seller will also want to check that you and your team are suitable to sell the business to (due diligence).
HM Revenue and Customs
Before you can buy the business, you might need to get approval from HM Revenue and Customs. Your accountant will be able to tell you if you need this approval and what you'll need to do.
3. Arrange funding for the buy out
You'll need to arrange funding for your management buy-out. This could include money:
- for the buy out
- to keep the business running day-to-day (working capital)
- you'll need to spend to deliver your business plan (capital expenditure)
There are different ways to fund a management buy-out. These include:
- your own money
- borrowing from banks
- selling shares (equity finance)
- 'deferred consideration'
Borrowing from banks
Banks can offer businesses:
- invoice finance
- asset finance
What they're willing to lend you will depend on the security you can offer them.
'Security' is something you or the business own (an asset) which you can offer the bank, if you can't repay the money they've lent you.
Find more information about borrowing from banks.
Selling shares (equity finance)
You could fund your management buy-out by selling shares to:
- friends, family or employees
- angel investors and angel networks
- crowd funders
- venture capitalists
- government funds
- private equity funds
Your management team will need to buy some of the shares themselves. This shows their commitment to the business.
Find more information about selling shares.
'Deferred consideration' is where you don't have to pay all the money for the buy-out in one go.
This allows you to pay back the rest of the amount like a loan – either in one lump sum or in stages.
You'll need to pay interest on this.
You might also need to offer security (an asset) as a safety net for the seller, if you can't repay the money they've lent you.
Show you're a suitable buyer
The seller will need to check that you and your management team are suitable buyers to sell the business to. This is known as 'due diligence'.
The seller's financial and legal advisors will do this due diligence.
As part of this you'll also need to review and agree to certain legal documents. Depending on how the management buy-out is funded, this could include:
- a sale and purchase agreement
- a vendor loan note
- a banking agreement
- security documentation
- an investment agreement
- an employment agreement
Help and advice
Contact a lawyer if you need help or advice with your management buy-out. You should do this as early as possible.
You can find a lawyer on the Law Society of Scotland website.
You can find an accountant on the Institute of Chartered Accountants Scotland website.