Valuation, Funding and Tax Consequences in a Management Buyout (MBO)

For capable management teams, an MBO can provide an exciting opportunity to further financial and career goals. It’s a common misconception that the team will have to fund a deal themselves and quite often this is not the case. There will be some financial risk, but it should be manageable and act as an incentive to drive the business forward.

Valuation and Deal Structure

Determining the value of the business is a key step in any MBO. Common valuation methods include earnings multiples, discounted cash flow (DCF) analysis, and asset-based valuation. An MBO’s structure may include several components:

• Equity Purchase – Managers may buy shares in the company directly, often complemented by financing options.
• Earn-Outs – An earn-out arrangement may be used, where part of the sale price is contingent upon achieving specific future performance targets, reducing the upfront financial burden for the buyers.
• Debt-to-Equity Ratios – MBO deals often involve a mix of debt and equity. Finding the right balance between these is essential to ensure the business remains financially healthy post-acquisition.

Funding

Each funding source has implications on ownership structure, control, and debt obligations, so it’s crucial to assess options carefully to achieve a sustainable balance. Typical funding sources include:

• Asset Finance – A business can leverage against the assets in the company, usually property, stocks or debtors. This can be a good option for asset-rich businesses.
• Private Equity Investment – Private equity firms often support MBOs by providing capital in exchange for a share of ownership, allowing management to purchase the company while retaining a meaningful equity stake. This route can also provide additional benefits to help professionalise a management team and expand the business.
• Seller Financing – The selling owner may agree to finance a portion of the sale price, allowing the management team to pay over time, which can help bridge financing gaps.
• High Street and Private Debt  – In addition to asset finance, banks will often consider providing a cash-flow term loan, repayable over 3-5 years to assist an MBO.

Tax Consequences of an MBO 

Tax considerations are crucial in MBOs for both the seller and the management team:

• Capital Gains for Sellers – Selling owners can benefit from capital gains tax treatment, often at a lower tax rate than regular income, on the proceeds of the sale.
• Stamp Duties and Transfer Taxes – In some cases, stamp duty or transfer tax may apply to certain assets being transferred, potentially affecting the structure of the deal.
• Deferred Compensation – If the management team receives seller financing or equity as part of the deal, certain deferred compensation arrangements may have tax implications for both parties.
• Deductible Interest Payments – If the MBO is funded through debt, interest payments on that debt may be deductible, offering a potential tax shield that can reduce the effective cost of the acquisition.

It’s essential to engage tax experts early in the MBO process to optimise the structure and minimise tax liabilities.

The MBO Process

1. Initial Feasibility Assessment – Management and owners assess the viability of the MBO, determining alignment on goals and preliminary valuation.
2. Financial Structuring and Funding – Financing options are explored, and funding commitments are secured, which may involve multiple stages of negotiation with lenders and investors.
3. Due Diligence – With the support of a specialist advisor, the management team conducts due diligence to assess risks, review financials, and confirm that the company is a sound investment.
4. Deal Structuring and Negotiation – Key deal terms, including valuation, earn-outs, and financing structure, are agreed upon.
5. Legal Documentation and Completion – The sale and purchase agreements are finalised, and any regulatory or compliance requirements are addressed.
6. Post-Completion Transition: Management assumes control, focusing on maintaining continuity while implementing planned strategic initiatives.

How The MGroup Corporate Finance Can Help Facilitate an MBO

We can advise you and work alongside your existing management team to secure funding for an MBO, profiling the management team to ensure the right expertise and cultural fit to take your business forward.

As specialist MBO advisors, we can provide invaluable support throughout the process by:

• Providing accurate and fair valuation assessments.
• Utilising a network of lenders and investors to secure finance and helping to structure and secure necessary funding for the transaction.
• From tax optimisation (in collaboration with our colleagues at The MGroup Accountancy Practice) to balancing debt and equity, we can advise on deal structuring for maximum long-term success.
• Coordinating due diligence, legal, and financial tasks, to ensure the process runs smoothly and efficiently.
• We help owners or management teams navigate sensitive negotiations, balancing competing interests to reach a mutually beneficial agreement.

If you are a business owner or member of a management team considering an MBO and would like an initial conversation with a specialist advisor, please contact Partner Geoff Pinder (07717 874357) or Head of Transactions Nick Lankester (07760 270728) for a confidential discussion.