Keep ownership, and your legacy, within the family by structuring a transparent buyout with balanced financing, flexible terms and clear governance to ensure a smooth transition.
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A management buyout can be a great way to hand the family business over to the next generation. But the complexity of the deal can be heightened when you add in the additional factors of family relationships, responsibilities and commitments.
Getting your financing mix right is a fundamental part of a successful family management buyout. Balancing equity and debts is critical, so it’s important to choose the best funding arrangements for you, your family and the future of the business.
Let’s take a look at the optimum way to structure your family management buyout.
In a traditional management buyout (MBO), the existing management team purchases the company from the current owner. It’s one way for the owner to exit the business, while passing their legacy onto an experienced top team.
In the context of a family MBO, the existing managers will often be relatives and family members.
An MBO offers an option for succession that helps the owner sell up, liquidate their equity and hand over the reins to other family members. It also gives other family members an opportunity to own the business and drive the family legacy.
There are multiple reasons why you might consider a buyout:
Whatever the circumstances, there are plenty of benefits to a family-based management buyout, rather than a traditional deal or external acquisition.
For example:
For your family MBO to be successful, it’s sensible to put plenty of thought into the optimum structure for the buyout.
Before the deal can progress, think carefully about how the deal will be defined, where the funding will come from and how ownership will be agreed, both within the family management team and the wider family.
As a starting point, think about:
Will this be a full or partial buyout? In other words, will the current owner, or owners, still retain some shareholding in the business? Or will you buy the company outright?
You could consider hybrid ownership, with several family members owning a stake in the company. Staged payments could also be an option, with the family top team gradually paying off the deal in instalments to the previous owner.
Think about the dynamics in the family and how these could influence your chosen structure once the company is switched to new ownership and leadership.
Who will be in control of the company? Will you appoint an internal or external chair and CEO? It’s always worthwhile weighing up the financial capabilities of each family member and how much capital they could contribute to the deal.
Ultimately, the deal needs to be fair to all family members, with all negotiations and agreements kept open and transparent – trust within the family is paramount.
When designing the terms of the buyout deal, make sure that you’re building flexibility into the agreement, so each family member is treated fairly.
Balancing family relationships and business viability is challenging. There will no doubt be plenty of discussion and disagreement along the way, but ultimately you need the business to be on solid ground, without creating any damaging rifts between members of the top team or the broader family unit.
The buyout doesn’t have to happen as one singular and complete deal. A staged buyout is a possible option, allowing a gradual transfer of ownership.
A staged buyout allows ownership to be handed over to the new leadership team in increments. This helps to reduce the risk of a full-blown change of owner, while keeping the current owner involved in the transition process.
To purchase the family business, whether in whole or in part, you’re going to need access to substantial finance to fund the deal.
Let’s take a look at some of the routes to finance that are available:
Aggregating enough funding to cover the purchase price will be a major consideration. But be sure to factor in the company’s current revenue and cash flow projections and what the business can afford in terms of monthly repayments.
Buying out a family member’s share involves agreeing on a fair valuation, securing the necessary funds, whether through personal savings, company cash, bank or specialist loans, or even seller financing, and formalising the transaction with clear legal documentation, all while keeping communication open to preserve family relationships.
Here are the most important elements to consider:
Families can be complex and sometimes volatile. Getting everyone in the family to agree on a course of action for the management buyout will require open and honest communication and a large amount of diplomacy.
Agreeing on the valuation of the business or share price can be one of the flashpoints.
Valuation can be a sensitive topic. The seller will want a high return on their investment in the business. The buyers will want a competitive price that doesn’t land the new owners with crippling levels of debt.
It’s always sensible to get an independent valuation from an experienced mergers & acquisitions (M&A) professional. An objective, third-party valuation removes some of the emotion from the pricing quandary, allowing clearer negotiation.
Being totally transparent about pricing, negotiations and agreements is vital, especially if some family members are not involved in the operation of the business.
Succession can be another potential point of friction. Make sure you address succession planning early, so you clarify who will be taking on which roles and C-suite responsibilities once the buyout is complete.
If other family members disagree with your plans for a family management buyout, it's crucial to understand the root cause of their objections. Objections may stem from a variety of factors, including financial concerns, a fear of losing control, emotional attachment or simply a lack of information. Open and transparent communication will be key.
Try to:
Business loans can be used to fund your upfront buyout costs or provide finance to make staged payments to the exiting owner.
Flexible loans, like those offered by iwoca, are ideal for MBOs:
Small business loans from specialist providers like iwoca are also a great way to bridge seasonal cash flow gaps and keep the lights on in the business once the MBO deal is completed.
Any MBO deal will have multiple legal and tax variables to factor into your wider strategy. Make sure these get due consideration within your planning process, before they lead to any snagging issues with the deal.
Whether gifting or selling is the best move will be highly dependent on the individual circumstances of your family business and sale conditions.
While outright gifts can attract inheritance tax (IHT) if the donor dies within seven years, Business Relief (BR) can offer up to 100% IHT exemption on qualifying business assets held for at least two years.
Additionally, Gift Hold-Over Relief can defer capital gains tax (CGT) on the transfer of business assets as a gift, pushing the liability to the recipient when they eventually sell. Potentially the seller can pay CGT at a lower rate of 14% if they qualify for Business Asset Disposal Relief (BADR) – BADR does have a £1 million lifetime limit and will see rates increase to 18% in 2026.
Selling the business outright would typically trigger immediate CGT for the seller on any gain, although BADR could reduce the rate on qualifying gains.
Changing ownership and control of the family business is always going to be an emotive process. There are likely to be emotional ups and downs, sibling dynamics and a certain amount of tussling over control and responsibilities.
The important thing in these volatile situations is to encourage open dialogue and mediation, where it’s needed.
Wherever possible, aim to build trust between all family stakeholders, by making plans clear and being honest and transparent about all discussions. Rather than making negotiations about price and finance a potential wedge, use open dialogue to ensure everyone is being treated fairly and equally.
Finalising the management buyout of the family isn’t the end of the conversation. Once ownership has been transferred, or a stepped handover has been put into play, a new phase begins – a phase with new leadership and a new outlook.
Critical areas to focus on post-buyout will include:
The period immediately after the MBO will be turbulent, but by thinking through these elements prior to the buyout, you’ll end up sailing through far calmer waters.
If you’re looking for straightforward access to finance for your family MBO, iwoca is here to provide fast and flexible access to the capital you might need.
Our Flexi-Loans can support the stability of your post-buyout business. Borrow the money you need to reinvest in your team, operations or growth plans.
