Exit Structures

What is a management buyout and how does it work?

Q: What is a management buyout and how does it work?

A management buyout (MBO) is a transaction in which the company's existing management team acquires the business from the current owner. The management team rarely has enough capital to fund the full purchase price themselves, so MBOs are typically funded with a combination of three components: equity contributed by the management team (often 10 to 20 percent of purchase price), debt financing from a bank or SBA lender (40 to 60 percent), and a seller note provided by the exiting owner (20 to 40 percent). The seller note is what makes most MBOs financially feasible, because management teams cannot raise the full purchase price from banks and personal savings. The seller receives payments over time (typically 5 to 7 years) with interest, instead of a lump sum at closing. MBOs are typically priced at a discount to what an external buyer would pay, because the competitive tension of a full sale process is absent. However, they preserve culture, protect employees, and eliminate the uncertainty of an outside buyer.

Updated August 2026 · 5 min read

Short answer: A management buyout (MBO) is when your existing leadership team purchases the business. It typically requires a seller note from you (20 to 40 percent of purchase price), bank debt, and equity from the management team. You usually receive less than a competitive market process would produce, but culture continuity, employee protection, and succession certainty are the trade-off.

How the capital stack works in a typical MBO

Illustrative capital stack for a $20M MBO

Management equity: ~15%

Senior bank debt (SBA or conventional): ~50%

Seller note: ~35%

The seller note is what makes most MBOs viable. Without it, management teams cannot bridge the gap between what they can borrow and what the business is worth.

In this example, the management team raises $3M in equity (from personal savings, family, or a small equity investor), borrows $10M from a bank or SBA lender, and the seller carries back $7M in a seller note paid over 5 to 7 years with interest. The seller does not receive all cash at closing, but does receive a structured income stream.

The seller note: terms and risk

A seller note is a loan from the seller to the buyer, documented as a promissory note with principal, interest rate, and repayment schedule. Typical terms:

Interest rate: 6 to 9 percent (negotiated, often tied to market rates)
Term: 5 to 7 years, sometimes with interest-only payments in years one and two
Security: the seller note is typically subordinated to the senior bank debt, meaning the bank gets paid first if the business defaults
Protections: sellers typically negotiate covenants (financial ratio requirements), reporting rights, and cross-default provisions to protect the note

The seller note carries real default risk. If the business struggles after the transition, payments can be deferred or defaulted. Owners who carry back a large seller note in an MBO need to be confident in management's ability to operate the business without them.

Why MBOs typically price below market

In a full competitive sale process, five to ten qualified buyers submit competing offers, which drives the price to or near market value. In an MBO, there is one buyer. Management teams negotiate from their financial capacity, not competitive market pressure. A business that would sell for $25M in a banker-run process might sell for $18M to $20M in an MBO. The difference is the price of certainty, speed, and legacy.

When an MBO makes sense despite the discount

The owner's primary goal is business continuity, not price maximization
The management team has a strong operating track record without the owner present
The owner is comfortable with the credit risk of carrying a seller note
The business serves a specialized niche where outside buyers are few and the transition risk is high
Family dynamics make an external sale complicated

Alternatives to a full MBO

For owners who want both fair market pricing and management continuity, a private equity-backed management buyout (PE-backed MBO) can thread the needle: a PE firm provides the equity capital to pay the owner at or near market value, while keeping the existing management team in place with significant equity participation in the new entity. This is more complex to structure but removes the seller-note concentration risk for the owner.

See the article on partial sales and recapitalizations for how PE-backed structures work in practice.

Evaluating whether a management buyout, a PE recap, or a competitive sale process is the right path? The decision turns on your personal financial needs and timeline. Start with a conversation.

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