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Management buyout calculator
A management buyout rarely fails on price. It fails because the money cannot be assembled, or because the business cannot carry the debt used to buy it. This works out both, from your own figures, and shows what happens in a bad year.
Arithmetic and general information only — not financial, tax, legal or investment advice.
How a management buyout is funded
In most small deals the money comes from three places, and the balance between them decides whether the deal happens at all.
- Management cash. What the team can genuinely put in. It is almost always the smallest piece, and almost always the piece that gets a lender comfortable, because it is the part that hurts to lose.
- Senior debt. A bank lending against the business. The amount is set by what the earnings can service, not by what the price happens to be.
- A vendor loan note. Part of the price the seller agrees to take later, out of the profits of the business the buyers now run. Most MBOs need one, because the gap between management cash and bank appetite has to be filled by somebody, and the only person left at the table is the seller.
Larger deals add private equity, which buys a share of the company rather than lending to it. That changes what the managers end up owning as much as the price does.
The question that actually decides it
Not "is this a fair price". It is can the business service the debt, in a bad year as well as a good one. A structure that works exactly at plan is a structure that fails, because plans are not met exactly. That is why the output above shows cover at your figures and at twenty per cent below them: the second number is the one a lender will look at hardest, and the one that should decide whether you proceed.
What normally kills one
- A funding gap nobody closes. The three sources add up to less than the price and no one will move. Visible in an afternoon, and the reason to run the arithmetic before instructing anybody.
- Debt service the business cannot carry. Cover looks fine at plan and disappears at ninety per cent of it.
- The seller was the business. If the relationships, the pricing judgement and the key accounts went out of the door with the owner, the earnings the whole structure rests on were never transferable.
- Nobody agreed what happens if it goes wrong. A vendor note is a loan from the person you just bought from. What happens in a year the business cannot pay it is a conversation to have before completion, not during.
What this cannot know
It takes your figures at face value. It cannot tell you whether the EBITDA you typed is the EBITDA a buyer's accountant would accept, whether a lender will actually advance what you assumed, or what the business is worth. For the earnings question — what profit survives normalising the owner's pay and stripping one-offs — use the valuation calculator, which shows that working in full.
Common questions
How is a management buyout usually funded?
Three sources, in most small deals: cash the management team can put in themselves, senior debt from a bank secured on the business, and a vendor loan note — part of the price the seller agrees to be paid later, out of the profits of the business the buyers now run. Larger deals add private equity, which buys a share of the company rather than lending to it.
What is a vendor loan note and why do most MBOs need one?
It is deferred consideration: the seller is paid part of the price over time rather than at completion. Most management teams cannot fund the gap between their own cash and what a bank will lend, so without the seller leaving some money in, the deal does not close. It also signals the seller believes the business will keep performing, which is one reason lenders look for it.
How much debt can a business support in a buyout?
That is decided by cash flow, not by the purchase price. The test a lender applies is whether earnings comfortably cover the annual repayments with room to spare, and whether they still do if trading falls short. This calculator shows that cover ratio and what it becomes if earnings drop twenty per cent, because a structure that only works at plan is a structure that fails.
What normally kills a management buyout?
A funding gap nobody closes, and debt service the business cannot carry in a bad year. Both are visible before anyone instructs a lawyer, which is the point of running the arithmetic first. Price disagreements get negotiated; a deal that cannot be financed simply stops.
Does the management team end up owning the business outright?
In a deal funded by management cash, bank debt and a vendor note, yes — the debt sits on the company and the managers own the shares. Where private equity funds part of it, they take a share of the equity and the managers own the rest, which is why the funding route changes the answer to "what do I end up with" as much as the price does.
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