Structure
Management buyout (MBO)
A management buyout is the team that runs a business buying it. The funding is a stack of senior debt, vendor paper and the team's own equity, and the hardest decision is taking less debt than the market will offer.
Also called MBO · buyout financing · management buy-out · buying the business you run
Everything in the stack is somebody's money at risk. The order in which it is repaid is the order in which it is priced.
| Source | Where it ranks |
|---|---|
| Senior debt | First |
| Unitranche or stretched senior | 18–40 on the scale |
| Vendor paper | 45–72 on the scale |
| The team's own equity | Last |
Sources of funding in a buyout, ordered by where each ranks if things go wrong. No proportions are shown: the guides publish no typical management contribution and no typical vendor-paper share of price, so neither is asserted here.
What it is
The team that runs a business buying it from whoever owns it.
That single fact shapes everything else about the transaction. The buyers already know the customers, the margins, the people and the problems, so the diligence risk that dominates most acquisitions is largely absent. What is present instead is a financing problem: the team knows exactly what the business is worth and usually cannot fund it.
So an MBO is less a question about the company than about the stack of money assembled to buy it, and about how much of that stack is debt the company itself has to service afterwards.
What fills the price
Senior debt does most of the work, vendor paper sits next, and the team's equity goes in last and ranks last.
Senior debt is the largest and cheapest layer, secured on the business and repaid first. Where the price needs more than senior lenders will advance, a unitranche or stretched senior facility can reach further at a higher cost.
Vendor paper comes next: deferred consideration and vendor loan notes left in by the seller, ranking behind the debt and ahead of the shareholders. Then the incoming team's own money, which is meaningful against their own means and modest against the price. That asymmetry is the defining feature of a buyout and the reason the debt structure matters so much.
We do not publish a typical management contribution or a typical vendor-paper share, and you should treat any figure quoted for either with caution, because both vary enormously with the price, the seller's position and the team's circumstances.
What the market will lend and what the business can safely carry are two different numbers. Confusing them is how teams over-gear.
| Basis | Facility |
|---|---|
| Capacity, today's earnings | £7m |
| What a 20% downside supports | £5.6m |
Derived arithmetic on £2m of EBITDA at the top of the published bank senior range. Capacity applies the multiple to today's earnings; the downside applies it to earnings after a 20% fall, the shape the guides describe as a customer leaving and margin compressing.
Sizing the debt
Size on the bad year, not the good one. This is the single most important discipline in a buyout and the one most often ignored.
What the market will lend and what the business can safely carry are two different numbers, and confusing them is how MBO teams over-gear. On senior cash-flow terms a bank will typically lend around 2.5 to 3.5 times EBITDA to a decent lower-mid-market company; a unitranche fund will usually stretch to 4 to 4.5 times, occasionally to five for a strong, sponsor-backed credit with recurring revenue.
That is the capacity. The amount you should take is set by serviceability under a downside, where a customer leaves and margin compresses, not by the maximum multiple on the table.
Worked through, the gap is stark. On £2m of EBITDA, the top of the bank range offers £7m. Applying the same multiple to earnings after a twenty per cent fall gives £5.6m. The £1.4m between those numbers is the difference between a buyout that survives a difficult year and one that spends it negotiating with its lender.
Why cash conversion matters here
Because cash conversion moves the number as much as the headline multiple does, and a buyout team feels that immediately.
The multiple is applied to EBITDA, but the debt is serviced out of cash. A business that turns most of its EBITDA into cash carries more debt comfortably than one that leaks it into working capital and capital expenditure, whatever multiple either is quoted.
For a management team this is knowledge they already hold and frequently fail to use. They know which months are tight, which customers pay late, and how much stock the business has to carry before a busy season. That understanding should be driving the sizing decision, and it is more reliable than anything a lender will model from three years of accounts.
The teams that get this right take less debt than they are offered and sleep better. The ones that get it wrong discover the difference in the first quarter that misses.
What vendor paper does
It bridges the gap between the price and the funding without diluting the managers, which is why teams should ask for it before they ask for more debt.
Deferred consideration and vendor loan notes are simply part of the price left in by the seller, repaid over time out of the business. From the team's side they reduce the debt the company carries from day one and they cost nothing in equity.
There is a signalling benefit too, and lenders read it. A seller willing to leave money in is a seller who believes the numbers they have presented, which is worth something in a process where everyone else is being asked to take those numbers on trust.
The negotiation points that matter are the ranking, the term, whether interest accrues or is paid, and what happens on a default under the senior facility. Vendor paper that can demand repayment while the bank is unpaid creates a problem the senior lender will not accept, so expect it to be subordinated and expect that subordination to be documented properly.
Vendor paper is the quietest part of a buyout and often the part that makes it possible.
| Effect | How much it matters |
|---|---|
| Signals the seller's confidence | 5–28 on the scale |
| Spreads the seller's timing | 24–46 on the scale |
| Reduces day-one debt | 45–70 on the scale |
| Bridges the gap, no dilution | The one that counts |
What deferred consideration and vendor loan notes solve in a buyout, ranked by how much each matters to the team. Qualitative: the guides publish no typical vendor-paper share of price and none is asserted.
The equity rollover
Where the seller retains a stake rather than taking all the price in cash, and it changes the shape of the deal considerably.
A rollover reduces the funding required, aligns the seller with the outcome, and keeps knowledge in the business through the transition. It also means the team has a shareholder they have just bought from, with all the governance and relationship questions that follow.
The mechanics of a rollover sit with the tax and legal advisers rather than with the funding, and they are technical. Get that advice early, because the structure that suits the seller's tax position and the structure that suits the funding are not automatically the same, and reconciling them late is expensive.
The commercial question for the team is simpler: how much of the business do you want to own at the end, and what is the rolled stake costing you in that answer.
Where teams over-gear
Three patterns recur, and all three are visible in advance.
Sizing off a record year. The trailing twelve months that support the highest multiple are often the ones least representative of durable earnings, and a facility built on them is built on the peak.
Treating the maximum offer as the target. A lender quoting the top of its range is describing its appetite, not making a recommendation, and a team that takes all of it has spent the headroom that would have absorbed a surprise.
And funding the price gap with debt rather than confronting it. Where the price is beyond what the structure supports, the honest answers are to negotiate the price, ask for more vendor paper, or bring in outside equity. Adding another turn of leverage makes the deal happen and makes the following three years considerably harder.
What to settle before you start
Price expectations, the funding shape, and the team's own position, in that order.
A team that opens a conversation with a seller before understanding what the business will fund is negotiating without knowing its own limits. Get an indicative view of the debt capacity and the realistic structure first, then talk about price, because the two are the same conversation and running them separately produces an agreed price nobody can fund.
The team's contributions among themselves settle better early than late. Who is putting in what, on what terms, and what happens if one of them leaves in two years, are questions that are straightforward now and corrosive later.
And agree who is leading. A buyout run by a committee of equals with no mandate is slow, and sellers and lenders both read that as a signal about how the business will be run afterwards.
Common questions
How is a management buyout funded?
With a stack: senior debt doing most of the work and repaid first, a unitranche or stretched senior facility where the price needs more, vendor paper ranking behind the debt, and the team's own equity going in last and ranking last. The team's contribution is meaningful against their own means and modest against the price.
How much can an MBO borrow?
On senior cash-flow terms a bank will typically lend around 2.5 to 3.5 times EBITDA to a decent lower-mid-market company, and a unitranche fund will usually stretch to 4 to 4.5 times, occasionally to five for a strong, sponsor-backed credit with recurring revenue. That is capacity, not a recommendation.
How much debt should we take?
Size on the bad year, not the good one. On £2m of EBITDA the top of the bank range offers £7m, while the same multiple applied to earnings after a 20% fall supports £5.6m. That £1.4m is the difference between surviving a difficult year and spending it negotiating with your lender.
What percentage does the management team usually put in?
There is no published typical figure and we do not invent one. It varies enormously with the price, the seller's position and the team's own means. The realistic description is meaningful against what the team can find and modest against the price, which is why the debt and vendor paper structure carries so much weight.
What is vendor paper and why does it help?
Deferred consideration and loan notes left in by the seller, repaid over time out of the business. It reduces the debt the company carries from day one and bridges the gap between price and funding without diluting the managers. It also signals that the seller believes the numbers they presented.
Does cash conversion affect how much we can borrow?
As much as the headline multiple does. The multiple applies to EBITDA but the debt is serviced out of cash, so a business converting most of its earnings carries more comfortably than one leaking into working capital and capex. A management team already knows which months are tight, and should be using that in the sizing.
What is an equity rollover?
Where the seller retains a stake rather than taking the whole price in cash. It reduces the funding required and aligns the seller with the outcome, at the cost of keeping a shareholder you have just bought from. The mechanics sit with the tax and legal advisers and need addressing early, because the tax-efficient structure and the fundable structure are not automatically the same.
Where do buyout teams most often go wrong?
Sizing off a record year, treating the lender's maximum as a target, and filling a price gap with leverage instead of confronting it. Where the price exceeds what the structure supports, the honest answers are a lower price, more vendor paper, or outside equity.
The full treatment sits in the guide: financing a management buyout.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.