Jul 25
A management buyout (MBO) is where the existing owners of a company sell their shareholding, or a significant part of it, to the management team or a new company controlled by management. The management team could be made up of certain directors of the company, key employees or family members who work within the business or any combination.
An MBO is a popular choice for owners and management because it can ensure continuity within the business, as people with a working knowledge of the business and how it operates take control, rather than an external third party who may need time to get up to speed. It is also popular for family-owned businesses because an MBO can provide a means to keep the company within family ownership, albeit the next generation.
It can also be an attractive option because unlike a sale to a third party, the company does not have to be marketed and the due diligence process can be more streamlined. This can make an MBO transaction easier, smoother and quicker than a sale to an external third-party.
Both the selling shareholders and the management team, need to have enough confidence that the management team will be able to successfully run the business. For some companies, the management team will already be taking on most, if not all, of the responsibility of running the business, whereas for others it may be a big jump up for the management team to take full responsibility for, and ownership of, the company.
It is rare that the management team will be able to provide all of the cash consideration on completion to fund the purchase of the company. This means the parties need to consider how to structure the consideration for the MBO. There are a number of options that could be considered, including
The choice will often come down to liquidity of possible sources of cash and also accounting/tax advice received by the parties to ensure it is favourable to all. Thought should also be given as to whether some form of security, such as a debenture, should be given by the management team to secure any deferred payment obligations under the share purchase agreement.
For the management team, it will likely be the first time certain of them have been shareholders or directors of a company. Consequently, getting the management team to consider, as early as possible, how they will run the business after the MBO is advisable. Constitutional documents, such as articles of association and shareholders’ agreements, can be put in place to set out items such as directors’ and shareholders’ decision making (and ‘reserved matters’), how the company is to be funded, how profits are to be distributed and any restrictions on future transfers of shares.
The Corporate and Commercial team at Raworths can assist in advising the selling shareholders and/or the management team in all legal aspects of an MBO.
This involves drafting or reviewing the legal documents to effect the MBO including a share purchase agreement, security documents (if required) and all relevant corporate approvals. In addition, we can advise the management team on their next steps including putting in place new articles of association and/or a shareholders’ agreement. These documents would guide how the business will be governed moving forwards and assist with the smooth transition of ownership enabling the business to continue to develop and grow.
Harry Brown is a Solicitor in the Corporate and Commercial team at Raworths based in Harrogate, North Yorkshire.
Published on 28 July 2025
The information and any commentary contained in this briefing is for general information purposes only and does not constitute legal or any other type of professional advice.
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