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Buying A Business

M3 Corporate Finance are Independent Finance Specialists solely focused on project managing Business Buy Transactions, Business Sell Transactions and Business Fund Raising projects.

Our backgrounds are varied and relevant and include corporate finance accounting, raising finance and wide ranging company side experience - all the necessary skills needed to make your transaction a success.

We work closely with clients at every stage of the process, providing the following services:

  • Assist with development of strategies
  • Development of the business plan
  • Securing finance
  • Financial modelling
  • Assisting with negotiations and transaction structure
  • Assisting with closure of the transaction

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A Guide to Management Buy Out (MBO)

Target Audience

This guide provides an overview of the key aspects to conducting a Management Buy Out (MBO).

Target audience: Management teams that wish to purchase the business that employs them


M3 provides specialist corporate finance advice to Management Buy Out teams, Management Buy In teams, shareholders and directors of companies and private equity houses concerning: Exit Strategy and Company Sales, MBOs and MBIs Corporate Acquisitions, Development & Replacement Capital, Corporate Divestments and Restructuring, Recapitalisation, Equity Release ('cash out') and Vendor Roll-over.

As a manager, you will realise that an MBO could be the best opportunity that ever comes your way. Looking around, we see countless opportunities for MBOs. They exist in private family businesses where the owner wishes to retire, all the way up to overseas multinationals, which may have decided to exit their operations in this country.

In some cases, managers may not feel that they are well placed to undertake an MBO, even though they are sitting on a great opportunity. Our experience has shown, however, that the best MBOs have the same common elements:

  • they have management teams who spot the right circumstances;
  • they work with the right people; and
  • they have the confidence to make their own luck.

MBOs are an ideal opportunity for managers to satisfy their entrepreneurial aspirations and a chance to acquire a significant equity stake in their own company. This is a desire many have but only a few ever act upon as many have doubts about how to pursue that dream.


What is a Management Buy Out?

A Management Buy Out or "MBO" is the purchase of a business from its owner by its existing management team usually with the help of external funders.

Getting Started - The Basics

How are MBOs structured and funded?

For the sole purpose of buying the company and financing the purchase, management and the funders create a new company (Newco). In the most common structure, Newco acquires 100% of the shares in the target company and thus becomes the holding company. Newco then raises different types of financing from different sources.

Funding for a MBO will come from a variety of sources. The bulk of the funding will normally be provided by financial institutions, primarily from banks and Venture Capitalists / Private Equity Houses. Debt and working capital facilities (loans and overdrafts / invoice discounting) are typically provided by a bank.

Equity investments are most frequently provided a Venture Capitalist / Private Equity House. A Venture Capitalist and Private Equity House are similar in that they both provide third party equity to buy businesses - typically a Venture Capitalist looks at smaller deals and a Private Equity house at larger deals - so we will refer to them both as Venture Capitalists for the rest of this guide.

In addition, in certain circumstances the vendor may be willing to defer some of the consideration for the business, and in the current market place this has become a regular feature. The management team will also be expected to invest, but in reality this investment is more to show their commitment rather than to be a major source of funding.


A bank typically provides up to 60% of the total funding need. The bank will have security over the assets of the business acquired and will require to be repaid in priority to the Venture Capitalist. Accordingly the bank profile is one of lower risk and therefore will command a lower return (via the interest charge). From time to time, if there are few actual assets but cash generation has been and will remain strong then the bank may also provide a "cash flow loan" as part of its proposal to increase the amount it lends over and above the amount it has security for.


Depending on the situation vendor financing is usually a matter of negotiation. Vendor financing can be either in the form of deferred loans - after the bank is fully or partially out - or equity, generally in the same proportion of ordinary shares and loans as the Venture Capitalist. Vendor financing can be useful in bridging any price gap. However, some vendors may particularly appreciate the opportunity to reinvest part of their proceeds in the new entity and so provide them with an ongoing involvement and an upside potential.
This continuation of emotional ties, and the possibility of a share in higher proceeds further down the line, can be a strong influence for vendors to choose a MBO over a trade sale.

Venture Capitalist

The Venture Capitalist typically provides up to 50% of the funding required for the MBO although it can be up to 100% in special circumstances. They will "bridge the gap" between the other funding sources and the price. They will stand behind the bank and Vendor and therefore require a greater level of return. They will achieve this by subscribing for a percentage of the ordinary share capital of the business alongside management with the rest of their funding typically being invested as loan stock.


The management team is likely to invest the smallest amount but stand to make the greatest capital gain. The financial characteristics of an MBO therefore present management with the opportunity to acquire the business they are running, financed largely by money provided by external financial institutions with repayment of that finance flowing from the profits generated by the business acquired and/or on ultimate sale.

MBOs can be ingeniously engineered, financially speaking, and the leverage effect of paying partly for the business using debt, may boost shareholders returns. However, an MBO is never purely a financial play because the most important prerequisite and driver of shareholder value is a growth in company value. Without growth the model struggles to work. Management is expected to grow the business, invest for the future and increase profits if it is to succeed in adding value over the long term.

How to spot an MBO opportunity?

The opportunity for an MBO may arise for a number of reasons;

  • the owner of a private company may wish to retire
  • shareholders may have conflicting interests leading to a requirement for certain shareholders to be 'bought' out
  • a group may decide to sell a subsidiary because it has become non-core or needs to realise cash
  • a receiver or administrator may wish to sell a business as a going concern
  • an institutional owner of a private company may wish to realise its investment
  • a company may not be well suited as a public company and management may decide to take it private

The Management Buy Out Team

It is often said that the 3 most important ingredients for a successful MBO are management, management and management. That is largely true and the importance of an experienced, committed and balanced team cannot be underestimated. There are other key features however for a successful MBO:

  • an effective and well balanced management team with the hunger and desire to take control of their destiny and back their own judgement
  • a track record of delivering consistently strong profit growth
  • a commercially viable business
  • a demonstrable growth strategy for the business
  • a strong competitive position preferably in a growing sector
  • a willing vendor with realistic price expectations the buy-out must be capable of supporting the required funding structure. That means cash generation is paramount
  • a suitable exit or sale opportunity for the business at some point in the future to enable management to realise the fruits of their hard work. This is also essential for a venture capital investor

What is expected of the management team?

Corporate financiers will often say that the three most important ingredients for a successful MBO are "management, management and management". The quality of the management team is the most important element of a successful MBO. Funders need to be convinced that the team has all-round strengths and can successfully manage the business independently. A high level of commitment to the MBO and to its subsequent successful growth is also essential. Entrepreneurship is key here but management must also have a clear strategy for building the business.

In general, the management team will include up to three or four managers. Other managers and staff may also be given the opportunity of investing, but this is often done through share options.

A typical managers in a MBO are:

  • Managing Director
  • Finance Director
  • Sales Director
  • Production/Operations Director

Management will also need to convince their backers that they have a sound growth strategy and that they are capable of implementing it. It is also vital for the smooth running of the deal to appoint a corporate finance adviser at the outset who will project manage the MBO on a day to day basis, co-ordinate the various parties involved and drive the timetable through to a successful conclusion.

How much money will we need to invest personally?

Each member of the management team is expected to invest personally. The amounts involved are intended to signify commitment from the individuals concerned but will be small relative to the total size of the financing required. The team leader / CEO will usually invest more than other key team members.

A "rule of thumb" is for the CEO to invest around one times their annual salary but it will depend upon personal circumstances. The other members of the team will invest less than the CEO. It is quite common for members of the management team to borrow money from a bank in a personal capacity to finance their investment and your corporate finance adviser can guide you on this aspect.

Should the management team already have some stock or options in the target business, the funders will expect you to reinvest your capital gain because they will want management to be "buyers" not "sellers".

Viable business

The business must be capable of operating independently as a commercially viable entity. This is especially important where it concerns a MBO of a division of a larger group and you will need to ensure the company must not too dependent on intergroup trade; it must have sufficient critical mass; it must have access to the necessary trademarks, licenses and brand names; and there must be no dependence on group distribution and sales force.

Management will need to demonstrate, via a robustly constructed business plan that as well as there being a commercially viable business, there is a demonstrable growth strategy and it has a strong competitive position preferably in a growing sector.

Willing seller

At the risk of stating the obvious, without a vendor who is prepared to sell at a realistic price, there can be no deal. Management needs to understand the motivations of the seller and consider the vendor's rationale or strategic reasons for disposing of the business. Many vendors may not consider a MBO until it is suggested to them.

At the first opportunity, it is up to management to take charge of the situation when it appears as if their company might come up for sale or, in the case of a private company, where factors such as age or health may be becoming a factor for the current owner. Equally, in suggesting the idea of a MBO to the shareholders, management has to point out the advantages over a trade sale.

Initiating MBO discussions can be delicate and advice is important.

When should we approach the vendor?

Without a willing vendor the deal will not happen, so they will need to be approached early on in the process. It will depend on individual circumstances as to who should approach the vendor - either the management team or the advisor.

Before making a formal approach to the vendor it is sensible for your financial adviser to undertake an initial feasibility study to confirm to you that any proposed deal will be viable and fundable. Dealings with the vendor need to be handled carefully as the team will be employed by the business during the MBO process and possibly thereafter should the deal not complete.

Sensitivity is paramount. Until vendor approval to progress the MBO opportunity has been obtained care should be taken to observe your fiduciary duties to the shareholders of the business. The timing and nature of the approach is a critical area and one on which your adviser will guide you.

Willing funder(s)

In order to be able to buy the company, management needs the financial backing of Venture Capitalist and banks to provide equity and loan capital. Venture Capitalists look for strong and stable businesses with a strong management team. They like to invest in companies with a potentially leading and defendable market position and growth prospects.

To make a return on their, and management's, investment it is important that there is a suitable exit opportunity in the future. Why are exit opportunities so important in an MBO? Before your funders invest they will want to assess the opportunities for selling.

This may seem somewhat premature but remember the Venture Capitalist (and management team) realise their gains predominantly on exit so, how, when and to whom they will exit is key to their investment appraisal. Venture Capitalists need to be able to realise the value of their shareholding at a significant capital profit often over a three to seven year time horizon.

They will achieve this in a variety of ways:

  • A sale of the company to a trade buyer;
  • Sale of the company to another venture capital/private equity house;
  • Management may occasionally be able to buy-out the shareholding of the private equity house through a secondary fund raising ('Secondary buy out'); or
  • A flotation of the business on the Stock Exchange.

The most likely exit route will be a sale of the business to a trade buyer and your Venture Capitalist will want to be satisfied before investing that a pool of likely buyers exists and that your business will be an attractive proposition to a trade buyer at some future point in time.

Target Audience: Any company, business or individual seeking to purchase a business

Introduction to buying a business

Buying a business requires careful planning if a successful outcome is to be achieved. M3CF works closely with clients at every stage of the process to ensure success. This guide has been distilled from our experience of many acquisition transactions, and is in the style of a general walkthrough of the acquisition process. Please do not hesitate to contact us for further information.

  • Preparation for buying a business
    • After the initial project consultation we arrange a meeting to discuss and agree an appropriate target business, including size, fit, geography, stage of development, and likely target price range as well as the transaction and funding structure.

  • Finding a target business
    • We undertake a research exercise to identify potential targets, typically through a combination of our own knowledge and contacts as well as reviewing our Business Intelligence database and carrying out further desktop research.
    • Where appropriate, we will contact potential targets by telephone, on a no names basis, with a view to confirming their current position and appetite for a transaction.
    • A research report is then prepared and presented identifying and analysing the potential targets.
    • An appropriate shortlist of potential targets is drawn up and a contact and approach method is agreed.

  • Approaching Potential Targets
    • An approach to potential targets is carried out on behalf of the client to confirm their interest.
    • M3CF acts as a primary point of contact for potential targets.
    • M3CF then arranges and attend meetings with target businesses to gain a fuller understanding of the company and the opportunity it presents for you.
    • We assist in the preparation of a questionnaire and presentation for use at such meetings, to gather information likely to be required to make decisions on next steps.
    • At this time we gauge likely price expectations.
    • Should site visits be appropriate, M3CF will make the arrangements
    • We co-ordinate and manage the provision of further information.
    • An evaluation is carried out on the relative merits of each target.

  • Negotiating Heads of Terms
    • M3CF place a formal offer on your behalf, having regard to price, deal structure, deliverability and any other key considerations.
    • We negotiate and prepare Heads of Terms, and arrange for these to be signed by all parties.

  • Business acquisition transaction management
    • M3CF also provide the following:
    • Generally advise and assist with negotiations.
    • Manage the provision of information.
    • Act as lead adviser and primary point of contact for prospective vendors and other advisers, lawyers, and financiers to the transaction.
    • Generally project manage the transaction.

  • Securing necessary finance
    • Should finance be required, M3CF also:
    • Develop a comprehensive business plan that accurately captures the unique characteristics of the proposed transaction.
    • Assistance in finding and matching potential sources of finance with the needs of the business. This will include selling the proposition and once interest is generated crafting a deal to meet the requirements of the business and satisfying the needs of the funding sources.
    • Lend support as required with negotiations with potential finance sources to determine mutually agreeable deal structure and associated paperwork.

    • To complete the deal we liaise with your lawyers in connection with the drafting of the sale and purchase agreement, and related documentation.