Is a Management Buyout right for you?

If you’ve ever wondered how you’ll one day step back from your business, a management buyout (MBO) might sound like the perfect solution. You keep it in familiar hands, your team gets rewarded for their hard work, and your customers hardly notice you’ve gone.

But like most things in business, it’s not that simple.

In this week’s episode of Making Your Business Less Dependent on You, I explore the advantages, challenges, and structures behind a management buyout and how to decide if it’s the right path for you.

Why business owners choose MBOs

One of my clients once told me he didn’t want to walk around the supermarket after retiring and bump into an old customer complaining about how things had gone downhill.

That’s a big reason many owners like the idea of selling to their management team. Your people know the business, they know the customers, and they understand your standards. Handled well, the transition can be smooth — perhaps even invisible.

And, if you’ve built your company alongside that team for years, there’s something satisfying about seeing them take it forward.

But there are drawbacks

An MBO is rarely the most profitable route.

Your team probably won’t have the funds to pay full value upfront, and even if they could, few would risk all their personal savings on one deal. That often means part of your payment is deferred and relies on the business continuing to perform well after you leave.

You’ll also need to think carefully about what happens if it doesn’t. Would you really want to take legal action against people you once worked alongside every day?

These aren’t reasons to avoid an MBO but they are reasons to plan it carefully.

Structuring a management buyout

There are several ways to make a buyout work:

1. A sale of shares
The classic route: your team sets up a holding company to buy your shares. You’ll trigger Capital Gains Tax on the sale, payable by the 31st of January after the tax year in which you sell. Plan the timing carefully. Selling just after 6 April gives you almost 22 months before that bill falls due.

2. An Employee Ownership Trust (EOT)
An increasingly popular structure where at least 75% of the business is sold to a trust owned by employees. The big advantage? At the time of recording, the proceeds are tax-free. The company can also pay tax-free annual bonuses of up to £3,600 to employees.

3. A franchise arrangement
Here, you keep your company and its assets while the management team sets up a new entity to trade under your brand for a fixed annual fee. There’s no Capital Gains Tax, but the total fees will need to be higher to account for corporation tax.