MBOs come to the fore as owners seek a safe exit

Over the past year and a half, the COVID-19 pandemic has had an enormous impact on the exit plans of business owners across the UK. For some, a long-planned exit may have had to be put on hold until the economy stabilised. With restrictions now almost entirely lifted, those owners may now be looking to restart the process.

For others, exiting their business may have been the last thing on their minds, until the financial or personal impact of the pandemic caused them to reconsider. Conversely, some owners may have completely unrelated reasons to be looking to the exit door, such as widely anticipated changes to Capital Gains Tax.

However, there are numerous obstacles that business owners face should they look to sell their business in the current climate. These have contributed to a growing trend for management buyouts (MBOs) during the pandemic, as owners seek to make a secure, quick exit from their business, while achieving a reasonable valuation.

What issues are sellers facing?

As we outlined in this recent insight, COVID-19 caused M&A to rapidly switch from a seller’s market to a buyer’s market. Almost overnight, many traditional buyers put acquisition plans on hold (whether for financial or purely strategic reasons), while those that remained open to takeovers often targeted distressed acquisitions at massively reduced valuations.

Even if buyers on the current market aren’t explicitly opportunistic in how they approach acquisitions, they will still naturally factor COVID-19 into their valuations. For sellers, this creates a multitude of issues that could complicate their sale.

In this situation, sellers are faced with an unappetising choice between accepting a lower valuation or attempting to gain a higher valuation through protracted negotiations with a potential buyer or a time-consuming search for a buyer willing to come close to their valuation.

Naturally, no business owner wants to accept a low valuation for the business they’ve worked so hard to build. But, if they are targeting a quick exit (whether due to CGT or for other reasons), the alternative options may simply be too time-consuming.

If an owner is looking to make a timely exit without selling on the cheap, they may have to look at other options to a traditional sale – and this is where an MBO can come in.

The rise of MBOs

MBOs, although perhaps not always the most effective way to attract the best possible valuation, can help an owner make a controlled, safe and relatively speedy exit from their business while not accepting a valuation far below their expectations.

Providing the management team leading the buyout are capable of getting the right financing in place (more on this later), then the seller should be able to negotiate a final sum close to their initial valuation (albeit likely to be payable over a longer period of time and on different terms than a traditional sale).

So what could make an MBO the ideal business exit strategy in the current market? What are the potential challenges that the process might pose? We’ll also look at how BSR can help if you’re considering exiting through an MBO.

Advantages of selling via an MBO

When deciding how to exit a business, an MBO offers numerous advantages that can make it more attractive to the vendor than a traditional sale. Crucially, and this is particularly relevant at a time when many are looking to make a relatively quick exit, if a business has a strong management team in place, then choosing an MBO means that there could be a ready, willing and reliable buyer.

This can help make an MBO a quicker procedure than a typical sale by drastically reducing processes such as marketing the business for sale and (providing the seller trusts their management team) conducting seller’s due diligence. If a buyer is looking to make an exit prior to anticipated CGT changes, this could prove decisive in convincing them to use an MBO.

Exiting via an MBO can also mean a smoother negotiation process than an owner might experience when selling to a third-party buyer. The management team hoping to acquire the business will know and understand the company and respect its value. While they will, of course, seek to secure the best terms for themselves, they are perhaps less likely than another buyer to try and drive the price down – providing they can secure the requisite funding.

Negotiations are also likely to proceed more smoothly due to the good existing professional relationship between the seller and the MBO team. At a time when issues such as valuation gaps are causing M&A negotiations to drag on, this pre-existing relationship could prove valuable in helping to amicably and productively resolve differences over valuations and payment terms.

Finally, selling to a strong team that knows the business inside out can be crucial in reducing the risk of post-deal failure. A trustworthy management team that knows how the company operates, its problems and strengths, its sector, clients and customers, are a safe pair of hands likely to bring continued stability.

This can be valuable in offsetting one of the chief risks associated with MBOs. Often, in order to help the MBO team reach the seller’s valuation the sale price is tied into the business’ future earnings. While this is often perceived as risky, the business’ existing management team can be the perfect option to take it forward to future growth, helping the seller achieve a top-end valuation.


Earlier this year, insurance firm Blythin & Brown was acquired by long-standing senior managers Jonathan Blythin and Richard Picton through an MBO as the company’s shareholders and minority partners retired.


The deal saw two people who knew the business inside out make the step up to running the company, putting the firm in a solid position to target continued growth in the insurance broking market.


The MBO was supported by financing from Shawbrook Bank. Shawbrook Director Steve Armstrong commented: “This really was a fantastic opportunity in which to support the existing Blythin & Brown directors in completing an MBO of a well-established insurance business.”


“For us, this deal ensured management continuity as key people who were well versed in the day-to-day operations of the business have gained control as its owners step away into retirement.”

Challenges when selling through an MBO

The chief issue when selling via an MBO is, of course, financial. Typically, an MBO team will be less well-capitalised than a traditional buyer, meaning that they will usually have to turn to outside financing in order to complete the deal and, as mentioned above, structure it with a low up-front fee – placing an element of risk on the seller’s side.

While an MBO can mean a quicker marketing, due diligence and negotiation process, the seller’s exit will generally be contingent on the MBO team raising the necessary funds. There are, of course, numerous options for financing an MBO, ranging from seller financing solutions to bank loans and private equity investment.

However, raising financing from an external investor can be time-consuming. The MBO team will have to spend time researching and securing the right funding, while the third party lender will then need to conduct their own due diligence. If a seller is hoping for a quick exit, this issue could prove a sticking point.


Bradford-based Advanced Dynamics is a manufacturer of automated filling and packaging machinery that, since being founded in 2004, has grown into a £5.5 million turnover business with 22 employees across a head office and factory.


In May 2021, founder and managing director Malcolm Little opted to reduce his shareholding in the business and move to an advisory role through an MBO. The MBO saw sales director Tom Smith assume control as managing director, with support from advisory firm Mazars.


Commenting on his decision to sell through an MBO, Malcolm Little said: “Having worked closely with Tom for more than five years, I am confident that he has the skills and ambition to drive the business forward as we continue to expand our range and move into new markets.”


"He understands Advanced Dynamics, and has played a vital role in enabling us to exceed our target of growing turnover to £3m by 2020. I am looking forward to continuing to work with him in an advisory role as we target turnover growth to £10m over the next five years.”


Arran Smedley of Mazars added: “It is great to be able to support such a fast growing and positive business to fulfil its funding needs, allowing it to implement the next chapter in its growth story.”


"We were able to secure a flexible funding package that suited the business and the shareholders, and I wish Tom and Malcolm all the best in what I am sure will be a successful next phase.”


In this situation, Caple, a specialist in SME growth credit, agreed to provide Tom a long term loan of up to 8 years. The Caple team worked alongside Mazars to fully understand the ADL business model. This meant the loan required no personal guarantees, floating charges or any other form of security. Without this loan facility, the deal would not have eventuated.

Common methods of financing an MBO

Management funding
One immediate source that should be able to deliver at least some funding for an MBO process is from the management team themselves. This may be from stocks and investments held by members of the management or from private personal finances such as savings or property.

While this will rarely be enough to cover the full transaction fee, it can be valuable in more than one way. Not only can it help get the ball rolling in terms of funding, it can also demonstrate the seriousness with which the team is approaching the transaction to the seller and to any third-party funding providers they may approach.

Bank loans
If an MBO team is looking for outside financing while wishing to retain the bulk of the firm’s equity post-takeover, then they will often turn to a bank loan. As with any bank loan, this will involve the team repaying the amount borrowed at an agreed interest rate over a pre-agreed timespan.

The bank will perform a thorough due diligence process before sanctioning such a loan, however, and will invariably need to see the business’ financial figures and performance forecasts, as well as potentially any business plan the MBO team have in place. They will also look closely at the personal finances of each member of the management.

Bank loans for MBOs are more commonly granted in the form of secured loans, with the business’ assets or personal assets of the management team provided as security. In the case of an unsecured loan, the buyers will generally have to take the riskier approach of providing personal guarantees and accepting personal liability for repaying the debt if the business is unable to.

Specialist lenders
If a bank loan cannot be acquired, then a management team may look to an alternative lender for financing. Certain specialist lenders will provide financing for MBOs more readily than high street lenders, but buyers should be aware that these loans typically involve considerably higher interest rates than some other lending options.

Seller financing
Often during an MBO, a common source of financing is the seller themselves, who can offer or accept to defer some of the purchase price in order to help facilitate the takeover. Often, the remainder of the fee is then paid back by the buyer over an agreed period of time and with an agreed interest rate through loan notes.

Seller financing can be an effective way to ensure a quick MBO process by removing some of the need for the buyer to seek outside funding. If outside capital is still required, then seller financing can help to demonstrate a level of trust in the takeover that can be crucial in helping to secure other funding.

A popular form of seller financing is an earn-out, through which the buyer agrees to pay higher instalments based on the business’ performance. This can be helpful in facilitating an MBO in which there is a valuation gap during negotiations.

For instance, if the team taking over the business are less optimistic about its post-sale prospects than the seller and have lowered their valuation to avoid overpaying for a business that ultimately underperforms, then tying the final fee into the business’ future performance can help to assuage these concerns.

Private equity funding
Private equity firms often back MBOs as part of their acquisition strategies. Typically, this will involve the firm providing financing to the MBO team in order to take a share in the business. As the business (hopefully) grows post-MBO, the private equity firm’s share increases, usually until they choose to exit the business.

A private equity backer will generally seek to exit a business within the space of around five years, so any MBO buyer that seeks this kind of funding should be aware that private equity backing is only a medium-term form of investment and one that the lender will expect to see a return on.


Edward Minton of PE firm WestBridge has outlined what a private equity firm will typically look for before backing an MBO: “When we look to support a management buyout, we typically seek out companies with proven incumbent management teams that have been running the business for some time pre-deal.”


“Management teams come in all different forms but the successful ones tend to be highly entrepreneurial, well rounded, have deep networks within their niche markets and know exactly what they’re good at.”


“More importantly, they are self-aware individuals who understand their own weaknesses and are able to build a team around them with complimentary skills and capabilities to help drive value creation initiatives.”

How can BSR help if you’re considering an MBO?

Given the advantages that an MBO can offer for an owner looking to make a successful exit from their business, it would be a shame if the process was derailed by the management team not being able to secure the required funding in time.

After going through the process of vetting a management team, gauging their interest in taking over and negotiating the terms of their acquisition, seeing it fall through at the last hurdle could put a timely exit at serious risk.

At Business Sale Report, we’ve spent years building relationships with a range of corporate finance experts who could provide crucial advice and guidance to help facilitate the financing for an MBO.

If you’re considering an MBO and would like us to help connect you with an expert to discuss financing options, please get in touch with us here.

With low valuations and opportunistic buyers the norm as the COVID-19 pandemic drags on, owners looking to exit could be forgiven for being downhearted at the prospect of searching for the right buyer. In this scenario, an MBO could provide the perfect opportunity to make a successful exit without settling for a lower valuation.

What’s more, with valuations likely to be impacted by the pandemic for some time yet and the risk of CGT changes set to be prominent until at least next year, MBOs will continue to offer a reliable and potentially swift way for owners to exit their business. This should help to ensure that the increased popularity of MBOs continues throughout the rest of the year and well into 2022.

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