Management buy-outs: raising money to buy the business you already run

The founder is 64 and wants out. The two managers who have run the business for a decade want to buy it. Neither has £900k. That is a management buy-out, and it is one of the most fundable things on Find — because the business exists, the numbers are real, the team is proven, and the risk is structure, not whether anyone will buy the product.

The shape of a deal

A new company (Newco), owned by the management team and the investors, buys the shares of the trading company from the vendor. The price is paid from a mix of: bank or private-credit debt secured on the business; investor money into Newco (shares or loan notes); a vendor loan (part of the price deferred, paid from future profits); and an earn-out (part of the price contingent on performance). Management put in what they can — often modest in cash, significant in the equity they receive for running it.

A worked example

Harland Electrical: £3.4m revenue, £310k EBITDA, 18 staff. Price agreed at £900k (about 2.9× EBITDA — typical for a small contractor). Funded by: £400k senior debt over five years secured on the business; £150k vendor loan over three years; £350k investor loan notes at 10% with a small equity stake, or £350k equity for 35% of Newco. Management hold the rest. Debt service is about £100k a year, vendor loan £50k, investor interest £35k: £185k a year from £310k of EBITDA. Tight but workable, with a cushion for a bad year. Above about 60% of EBITDA going to debt service, the deal does not work.

What makes the numbers work

A price the earnings can service. Work backwards from EBITDA: what debt can it carry at 1.3× cover? That plus what investors will put in is the price you can pay, whatever the vendor thinks it is worth.
A vendor who wants the team to succeed. A vendor loan and an earn-out keep the vendor interested in a smooth handover and put part of the price at the vendor's risk. Vendors who want 100% cash on day one make MBOs hard.
Management who have run it, not just worked in it. Investors back the people who already know where the bodies are. A finance person on the team — or a fractional FD from day one — matters more in an MBO than in any other raise.
Clean due diligence. The business has years of accounts. Investors will read them all.

Where the money comes from

Senior debt: challenger banks, private credit — Found Credit lends into MBOs of this size. Investor capital: angels and family offices like MBOs because the downside is protected by an existing, profitable business and the upside is a management team finally owning the thing; on Find they appear as loan notes or equity in Newco. Vendor finance: negotiated, and the more the better.

Why investors on Find like MBOs

They can read the accounts. The risk is execution and structure, both of which they can assess. The instrument is often secured loan notes with a coupon — income, not just a hoped-for exit. And the founders are people who have been doing the job for ten years rather than people who hope to.

Questions founders ask

"The vendor wants more than the business can service. What now?"

Show them the maths. A price that cannot be serviced is not a price; it is a deal that falls over in year two. Most vendors will take a higher headline with more deferred and earn-out over a lower one in cash — the structure can bridge the gap if the total is reasonable.

"Can we use SEIS/EIS?"

Generally not — the schemes exclude acquiring an existing trade. Investors in an MBO are looking at yield and a secured position, not tax relief.

"How long does an MBO take?"

Four to eight months from first conversation with the vendor to completion, most of it legals and debt. Start the investor conversations once the vendor has agreed heads of terms, not before.

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