The Rise of the Buyout Market

Posted: Jun 14, 2018
Ian Dawson

The buyout funding market is currently awash with capital. Private equity funds with plentiful dry powder, traditional and challenger banks looking to fund buyouts and the growing number of debt funds has all led to increased competition, to increased debt multiples being achieved and to more creative and innovative deal structures being considered. Competition in the funding market has fuelled the number of buyout transactions in recent years and data from Experian Market IQ indicates the number of buyout transactions last year was 55% higher than the low in 2009.  It is, therefore, an opportune time to look at an MBO or MBI.


A management buyout (MBO) is the purchase of a business by its current management team using external finance, followed by company growth, repayment of debt and an eventual sale to realise value. A management buy-in (MBI) is the purchase of a business by an external management team whereas a buy-in management buyout, or BIMBO, is a combination of the two – a buyout by both the internal management team and external managers.  In recent years, we have seen an increased number of all three buyout structures, particularly MBIs and BIMBOs.

For shareholders, a buyout is a credible alternative to a trade sale, whilst for management teams, it is often a once-in-a-lifetime opportunity to become a business owner.  Buyouts work well when there is a strong management team, a profitable and cash generative business with good visibility of earnings and cash flow, a defensible market position and strong growth prospects.  However, buyouts are far from straightforward and pose many challenges for sellers and management teams alike. 

The responsibilities of an owner differ to those of a manager, and the transition does not happen overnight. An owner is a leader, responsible for strategy and the direction of the business, responsible for the employees and for delivering growth.  Shareholders should consider developing a management team capable of leading the business as part of their overall exit planning. Providing management with early responsibility for shaping and delivering strategy will develop their leadership capabilities.  Reducing the reliance on the current owners will also increase overall value, and often results in a more favourable deal structure.

Raising the topic of an MBO is a challenge and is often difficult to get right; once the conversation starts, the relationship between shareholders and the management team will inevitably change. Before any conversations begin, shareholders should seek advice to determine whether an MBO would provide the best possible deal and whether the management team is capable of raising finance and seeing a deal through to completion.

Ian Dawson Ian Dawson - Associate Partner

There are no rules as to who should initiate the conversation. However, an entrepreneurial management team, capable of leading a business, should be able to recognise a potential MBO opportunity and put forward a compelling proposition.  However, management may be reluctant to raise the subject for fear of getting ahead of themselves. Creating a business plan and raising finance takes time, so an early conversation suggesting that you, as a shareholder, are considering your exit options, including a sale to management, is often beneficial.

There are important considerations when valuing a business in an MBO scenario as opposed to a trade sale. A trade offer may result in a higher valuation due to synergies that can be realised post-deal. This method of value creation is unavailable in an MBO. In addition, how much finance the business can raise and service will impact on both price and transaction structure.

Although an MBO may not provide the highest price, this does not mean it can not deliver the best possible deal. There are many benefits to selling to the management team who know the business and the market intimately. This knowledge should make the process more efficient. An MBO can provide continuity for the business, the culture and safeguard the jobs of its employees.  An MBO also provides vendors with added flexibility to continue their involvement and share in the future performance by leaving money in. This also reduces the level of upfront finance required, ensuring the business isn’t overly-burdened with external debt post-transaction. 

In summary, the buyout funding market is strong, but completing an MBO is a challenging and complex process. Private equity, bank finance, asset-backed lending, subordinated debt and management’s own funds are all potential funding options with different characteristics, and it’s wise to seek external advice on which is the most suitable.  In addition, the shareholders selling and the management team must avoid “deal fever” during the process and ensure that business continues as usual. Planning and preparation should start early, and the shareholders and management team should be well advised so they can concentrate on running the business.

If you are thinking about an MBO, business disposal, or an acquisition please contact us at