Management buyouts: how it works, funding and pros vs cons

Management buyouts (MBOs) are a chance for a company’s existing management team to acquire the business they run.

They can be an effective tool for gaining control, aligning incentives or preparing for succession. But, they can also be very complex and therefore require careful planning.

In this guide, we’ll cover everything you need to know about management buyouts including funding options and legal and tax considerations. Plus, we’ll provide some tips for a successful transition.

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What is a management buyout (MBO)?

A management buyout is when a company's existing management team purchases the business from its current owners. Put simply, the managers become the owners and take on both operational and financial responsibility.

This often occurs when:

• The current owner wants to exit the business
• The company is underperforming, and the management team believe they can improve it
• There’s a succession plan in a family business.

Unlike a leveraged buyout by an external party, MBOs keep the business in familiar hands. This can do wonders for business continuity and company culture.

Common steps in a management buyout

MBOs typically follow a series of structured steps to ensure a successful transition:

1: Initial assessment and planning

• The business’ suitability for an MBO is evaluated
• Management team members who will participate are identified
• Personal and corporate financial readiness is assessed.

2: Valuation of the business

• A fair market value is determined using accounting records, EBITDA multiples and industry benchmarks
• Often an independent advisor is hired to avoid disputes.

3: Assemble the buyout team

MBOs often require financial, legal and tax expertise which is where an advisor comes in - helping to structure the deal, explain financing options and ensure regulatory compliance.

4: Secure financing

Funding is critical for the success of an MBO, and it can come from multiple sources - we’ll look at potential options for financing a little later in this guide.

5: Negotiation

A purchase price and transition plan must be agreed with the current owner and any ongoing involvement discussed.

6: Due diligence

It’s important to review any company accounts, contracts, liabilities, legal obligations and operational risks.

7: Legal and financial agreements

Contracts must be drafted to cover the sale, share transfer and employment terms for the management team.

8: Completion and transition

The final stage involves transfer ownership and communication of the changes to staff and stakeholders. Any agreed transition support must be implemented too.

Who are the key stakeholders in an MBO?

Typically, an MBO involves several key players:

• Management team: The buyers who will take control
• Existing owners: Typically, the sellers, providing guidance or financing in the short term
• Investors and financiers: Banks, private equity firms or mezzanine lenders
• Advisors: Legal, tax and financial advisors may help to structure the deal, conduct due diligence and ensure compliance
• Employees: While not directly involved in the MBO, staff morale and retention are critical during the transition period.

Funding a management buyout

MBOs can be expensive. Rarely do management have the full capital to purchase the business outright. This is where funding comes in, often in the form of:¹

• Bank loans: Traditional debt finance secured against company assets
• Seller financing: The current owner provides part of the funding, which is often paid over time
• Private equity or venture capital: Investors provide capital in exchange for shares or equity
• Mezzanine finance: Hybrid debt financing that bridges funding gaps
• Personal capital: The management team may invest personal savings or pension funds

The way in which a MBO is funded is essential to balance risk and ensure the business can sustain any debt repayment while investing in growth.

Legal and regulatory considerations

MBOs are highly regulated transactions. Some of the most important areas to consider include:

• Shareholder approvals – Ensure all relevant shareholders consent to the sale.
• Contractual obligations – Review existing contracts with suppliers, customers and employees.
• Competition law – Confirm the buyout won’t breach regulations.
• Employment law – Terms for the management team and other staff must comply with local employment regulations.
• Intellectual property (IP) – Ensure IP ownership is clearly transferred to the new management entity if needed.

Tax implications of management buyouts

There can be significant tax consequences for both buyers and sellers involved in MBOs. This includes:²

• Capital gains tax (CGT) – Sellers may be liable for CGT on the proceeds of the sale
• Stamp duty – Depending on jurisdiction, share transfers may incur stamp duty or similar taxes.
• Income tax on bonuses or deferred payments – Management remuneration related to the transaction may be taxed differently.
• Enterprise Investment Scheme (EIS) or reliefs – Certain reliefs may be available if the business qualifies.

Common challenges during management buyouts and how to overcome them

Management buyouts can offer significant rewards and opportunities, but they do also come with a unique set of challenges. Being aware of these early can help your team to plan effectively and improve the chances of success.

1. Balancing operational and ownership responsibilities

After an MBO, the management team is not only responsible for running daily operations but also for meeting investor expectations and overseeing financial performance.

This dual role can be difficult to balance in the early days and teams can become stretched.

Consider delegating operational tasks to senior management and create clear reporting structures so the management team can focus on leadership and strategic oversight.

2. Securing and managing funding

MBO financing can involve complex arrangements including debt, equity and seller financing. This can put pressure on cash flow and limit investment for growth.

This is where exploring multiple funding options can become beneficial. Be sure to maintain a conservative debt-to-equity ratio and use detailed cash flow forecasts to anticipate future shortfalls.

3. Employee retention and morale

Even with the best intention, ownership changes can create uncertainty among staff and there’s the risk of reduced productivity or turnover.

Communication is key. Keep employees informed about the process, their role in the organisation’s future and any changes to policies and benefits. This can help to preserve morale and engagement.

4. Integration of legal and operational processes

There’s often work required to update contracts, policies and governance documents. Overlooking this can result in disputes or legal issues down the line.

This is where legal and operational advisors can come in handy, ensuring all agreements, IP rights and regulatory requirements are addressed before the transaction completes.

5. Maintaining strategic focus during transition

With the additional responsibilities and pressures of ownership, it’s easy for the management team to get caught up in administrative tasks. All too soon, they may begin to lose sight of long-term growth goals as well as why they started.

Regular strategy sessions, clear KPIs and progress monitoring can help keep the team aligned with the company’s vision while navigating the MBO process.

Top tips for a successful MBO

1. Build a strong team - clearly define roles and responsibilities as well as succession planning
2. Get professional advice - engage experienced tax, legal and financial advisor
3. Secure adequate funding – plan for capital needs, contingency and working capital
4. Communicate with stakeholders – keep staff, suppliers and investors informed.

After completing a management buyout, it’s important for the management team to focus on long-term strategy.

This includes setting clear growth goals, monitoring performance, revisiting operational processes regularly and planning for contingencies. It might be that someone is responsible for identifying new market opportunities and investing in technology or staff development can help ensure the business thrives under its new ownership.

Don’t be afraid to make strategic adjustments to help the team stay aligned with investor expectations and maintain business stability.

Pros and cons of management buyouts

Advantages of a management buyout:

• Aligns management incentives with company performance
• Preserves business continuity and culture
• Can increase employee morale and retention
• Opportunity for long-term financial gain for management.

Disadvantages of a management buyout:

• High financial risk for management team
• Potential for strained relationships with existing owners
• Significant legal, tax and compliance obligations
• Debt servicing can limit operational flexibility.

Is an MBO right for my company?

The decision of a MBO shouldn’t be taken lightly and it’s essential to weigh up the pros and cons for your business. Typically, MBOs are most suitable when:

• The management team has the expertise and ambition to run the business
• The business is profitable or has clear growth potential
• Owners are willing to sell under reasonable terms
• Funding is accessible without over-leveraging the business.

In the event that any of the conditions aren’t met, it may be that an alternative such as external buyouts, management buy-ins or investor-led acquisitions could be better.

Plan for the future with Wise Business

Once your MBO is complete, managing cash, payments, and global operations efficiently becomes essential. That’s where Wise Business comes in, helping you handle finances seamlessly as your management team takes ownership.

Open a Wise Business account and you can hold and exchange currencies at once.

You can also send fast, secure payments to countries, and get account details to get paid in currencies like a local.

Other benefits include:

• No ongoing fees, minimum balance requirements or foreign transaction fees
• Debit and expense cards for you and your team, usable in 150+ countries
• Multi-user access with permission controls
• Batch payments to pay up to 1,000 people at once
• Integrations with popular accounting tools
• Wise API for automation and workflow
• Wise Interest to make funds work harder when not in use. Capital at risk. Growth not guaranteed. Wise Assets UK Ltd is authorised and regulated by the Financial Conduct Authority with registration number 839689. When facilitating access to Wise investment products, Wise Payments Ltd acts as an Introducer Appointed Representative of Wise Assets UK Ltd. Please be aware that we do not offer investment advice, and you may be liable for taxes on any earnings. If you’re uncertain, we urge you to seek professional advice. To find out more about the Funds, visit our website.

With Wise Business, your management team can focus on growing the company as it enters this new and exciting stage, rather than managing complex international payments.

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Sources used:

1. Gov.uk - Private Equity Buyout Funding Structure
2. MHA - Management Buy-Out - Key Tax Issues For Business Owners

Sources last checked on date: 28-Oct-2025