Not every business has managers who could buy it. Some have a good team that doesn't want the risk of ownership, and some have nobody below the owner at all. If that's your position, and you'd like to sell to someone who will run the business themselves, a management buy-in is one route. An experienced manager, or a small team, from outside buys the business and takes over running it.
This guide explains how a buy-in works from the seller's side, and where it differs from selling to your own managers.
What a management buy-in is
In a management buy-in, or MBI, the buyers are managers from outside the business. They're usually people with experience in your sector who want to own and run a business of their own. As in a management buyout, the deal is normally done through a new company the buyers set up, which raises the money and buys your shares. Your company carries on underneath, with its contracts and its staff.
Lenders see a team that's new to the business as a bigger risk, so buy-ins are often backed by an investor as well as a bank.
How a buy-in differs from a buyout
| Management buyout | Management buy-in | |
|---|---|---|
| Who buys | Managers already in the business | Managers from outside |
| What they know | The business from the inside, sometimes better than you | What you and your documents tell them |
| Due diligence | Lenders and investors still check, but the buyers know the detail | Usually more thorough |
| Warranties | Often narrower, because the buyers know the detail | The buyers rely on them more |
| Handover | Shorter, because the team is in place | Longer, and more of it depends on you |
| Conflict of interest | Your managers work for you while they bid | None, but you're sharing information with outsiders |
The second row matters most. In a buyout, the buyers often know the weak spots better than you do. In a buy-in, the buyers know only what they're told, and that shapes nearly everything else in the deal, from due diligence to the handover.
Checking the people who want to buy
If any of your price is paid after completion, you're relying on the buyers to run the business well enough to pay it. So check them as carefully as they check you.
- Their record running a business of a similar size, with references you can follow up.
- How the deal is funded, with evidence such as a letter from their lender or investor, before you share the full figures.
- Who the investor is, if there is one, and what rights it will have over the business.
- Their plans for your team and your customers.
- Whether they've worked for a competitor, and what that means for confidentiality.
Ask them to sign a confidentiality agreement before you share anything detailed, and share in stages. A buy-in team that doesn't complete still walks away knowing a lot about your business.
How a management buy-in is funded
Buy-in managers usually can't pay the full price themselves, so the money comes from the same places as in a management buyout. The managers put in some of their own, a bank lends against the business's profit or its assets, an investor may buy shares alongside them, and part of the price may be paid to you after completion. Our guide to management buyouts sets out each source and what it means for the seller. Four things tend to be different in a buy-in.
- An investor is more likely. Banks lend less readily to a team with no record in the business, so an investor often fills the gap, usually in return for a say over big decisions and a plan to sell its share within a few years. Ask what rights it will have, because it may end up with more control than the managers.
- The lender is relying on your figures. With no insiders to vouch for the business, the bank's view of it rests on your accounts and your handover plan, so expect its checks to run alongside the buyers' own.
- The managers carry more personal risk. Lenders often ask for personal guarantees, and the managers may have borrowed against their homes to find their share. People who have stretched to buy tend to want changes quickly once they're in.
- Money paid later depends on people you've only just met. Any part of the price paid after completion, whether a fixed deferred sum or an earn-out, rests on the new owners running the business well enough to pay you.
The legal restriction on a company helping to fund the purchase of its own shares applies to public companies and their subsidiaries. So a private company can usually give the buyers' lender security over its own assets, though your solicitor will check that the directors can properly agree to it.
The more of the price you agree to receive later, the more of it rides on that last point, which is the biggest difference in risk between a buy-in and a buyout. Our guide to earn-outs and deferred consideration covers how to protect money that's paid later, and most of it applies with more force here.
The buy-in management buyout
Sometimes the answer is a mix. In a buy-in management buyout, usually shortened to BIMBO, managers from outside join some of your existing managers to buy the business together. The insiders bring knowledge of the customers and the team. The outsiders bring experience your managers don't yet have, such as running a whole business or working with investors.
It can work well, but only if the two groups get on. New managers usually want to change things, and existing ones may want to protect the way things are done. Before you agree, ask how the decisions will be shared and who will lead.
Your existing managers face the same conflict of interest as in a buyout. While the deal is under way they work for you and are also trying to buy from you. Our management buyout guide explains how to handle that.
Warranties when the buyer doesn't know the business
Warranties are statements about the business that you make in the share purchase agreement. If one turns out to be untrue and the buyer loses out, they can claim against you. Buy-in managers can't check things from the inside, so they and their backers lean on the warranties more than insiders would.
Your protections are the same as in any sale, but they matter more here.
- The disclosure letter. Anything you disclose properly against a warranty protects you from a claim about it later, so disclose fully, even things that feel minor.
- Limits on claims. A cap on the total you could pay, a minimum size for each claim, and a time limit for making one.
- Your awareness. Some warranties can be limited to what you know, so you aren't caught out by something you couldn't have known.
- Indemnities for known issues. For a specific risk you both know about, a promise limited to that issue can be better than leaving it open.
Our guide to the share purchase agreement goes through each of these, along with warranty and indemnity insurance, which on some deals means the buyer claims against an insurer rather than against you.
Handing over to someone new
The handover is the hardest part of a buy-in, because the new owners have to learn the business while running it. Agree a handover plan in writing before completion. It should cover these things.
- How long you'll stay, and your role and pay while you do.
- Which customers and suppliers you'll introduce them to, and when.
- What happens if they want you to leave earlier, or you want to.
- How you'll be kept informed while part of your price is still to come, such as monthly figures or a seat on the board.
Your team needs thought too. Bringing in someone from outside can cause resentment, especially among people who hoped to step up themselves. Tell key people early, under confidentiality where you can, and introduce the new owners yourself. In a share sale the company stays the employer, so everyone's contract carries on. TUPE, the rules that move staff to a new employer, applies when the employer itself changes, as it does in an asset sale.
Expect the buyers to ask you not to compete with the business, or approach its staff and customers, for a period after you leave. Our guide to restrictive covenants explains what to negotiate.
The tax, in brief
Selling your shares in a buy-in is usually taxed like any other share sale, as a capital gain, and Business Asset Disposal Relief can reduce the tax if you meet its conditions. Where part of the price is paid later or depends on performance, the timing of the tax can differ from the timing of the money. If you keep a share in the buyers' company, as can happen in a BIMBO, there are anti-avoidance rules to check as well. Talk to your accountant before you agree heads of terms.
When a buy-in suits
In its favour
- A route to a sale when your own managers can't or won't buy.
- Buyers who want to run the business, so it's more likely to carry on much as it is.
- Experienced managers who may bring skills and contacts the business doesn't have.
Against it
- The buyers don't know the business, so due diligence takes longer and warranties matter more.
- The price may be limited by what the buyers can raise.
- Part of your money may depend on people who are new to the business.
- Your team may find new owners harder to accept than familiar faces.