This page is for the founder of an established company in Miami or South Florida whose managers have raised buying the business, or who wonders whether they could. Our guide to strategic buyers, private equity and individual buyers compares the outside buyers. Our business succession planning guide places a management buyout among the five routes a founder-led company can take. This page covers the sale to your own managers, from the first conversation to the day talks succeed or stop.
What is a management buyout, and how is it different from handing over leadership?
In a management buyout, some or all of the company's existing managers buy the ownership from you, with whatever combination of their own money and outside funding the deal requires. Handing over leadership is a separate decision. You can give your managers operating authority and keep the company, and you can do that first without any sale.
Keep the two questions apart when you raise the subject. A manager who welcomes more authority may have no wish to put personal money at risk or answer to a lender. Ask about ownership directly, and make it clear that declining will not count against anyone.
Selling also means letting the new owners make decisions you would not make, including decisions about colleagues you hired. Decide whether you can accept that before you start, because the managers will need the authority that comes with ownership.
How does selling to your managers compare with selling to an outside buyer?
The managers' advantage is knowledge. They already know the customers and the operations, so diligence can start further along and the current managers can stay in charge through the change. Their ability to fund the purchase is the question to test early, and the answer shapes much of the rest of the comparison.
| Question | Your management team | Strategic buyer | Private equity | Individual buyer |
|---|---|---|---|---|
| How well it knows your company | Knows the operations and the weak points from inside | May know the industry, and learns your company in diligence | May know comparable companies, and learns yours in diligence | Learns your company in diligence |
| How the price may be funded | The managers' own money, potentially with a lender, an outside investor or part of the price paid to you after closing | May use its own resources or borrowing | May combine the fund's capital with borrowing | Personal money and borrowing, sometimes with part of the price paid to you after closing |
| What happens to the team | The managers can stay in charge as owners, subject to any investor's control rights | Roles that overlap with the buyer's may be combined | Management may stay, with more reporting | The buyer usually becomes the leader |
| Who sees your information | The managers' advisers and any lender or investor they bring in | A company in your industry and its advisers | The firm, its advisers and any lenders | The buyer, its advisers and any lenders |
| A risk to examine | Payments due after closing may depend on how the managers run the company, and failed talks strain working relationships | Integration changes what you built | The firm's plan may differ from yours | The company's future rests on the buyer's own operating ability |
Use the table as a starting list for the conversation with your advisers. A buyer's category tells you what to ask, and the written terms tell you the answer.
When does a sale to your managers make sense?
The managers want to own the company. Ask each of them separately, in a conversation where declining carries no penalty. Interest expressed to an employer can be politeness, so follow up with the questions an owner faces, such as personal money at risk and decisions that affect colleagues.
One of them can lead the others. A group of department heads needs someone who settles disagreements across functions and answers for the whole company's results. Ask each manager privately who they expect that to be. If the answers differ, the group is not yet ready to buy.
The company already runs without you. Carlos's line from his banking years applies to this buyer as much as any other: "Your valuation scales only when your absence doesn't threaten the business." Managers who still bring every hard decision to you would be buying a company they have not yet run.
You can accept being paid partly after closing. If the managers cannot fund the whole price at closing, part of what you receive may depend on how the company performs under them. Ask your own attorney and tax adviser what that exposure would mean for you before you encourage a proposal.
Continuity matters to you. If keeping the company independent and its people in place is why this route appeals, write that down. It is the reason to prefer the managers, and the measure of whether their offer delivers what you want.
How do you know if your managers can run the company without you?
Look at the record before you ask anyone. Which decisions were made last quarter without you? What happened during your last absence, and what waited for your return? When two managers disagreed about priorities, who settled it?
A team can perform well inside its own departments and still depend on you to settle competing demands between them. That dependence is the gap to close before a sale, because after closing you will not be there to settle it. Our guide to building a second in command covers developing the person who can, and our exit readiness guide covers the evidence any buyer examines.
Before committing, a buyer needs to know who will run the company once the seller leaves. Your managers have to answer that question about themselves, and it is harder to answer clearly when the seller is also their employer. Give them operating authority early enough that the answer comes from evidence.
How would your managers pay for it?
Ask early how the managers expect to fund the purchase, because the answer shapes your own risk as much as the price. Each source raises questions for your own attorney, your tax adviser and a transaction adviser. Take these to them before you agree a price in principle.
- Their own money. How much will the managers commit personally, and what evidence of it will your advisers ask for?
- A lender. What evidence supports the proposed borrowing, and can the company meet the repayments while funding its operations? Ask your attorney how the lender's rights would affect any amount still owed to you, and whether any personal guarantee you have given the company's existing lenders would be released at closing.
- An outside investor. What ownership and decision rights would the investor and the managers each receive, and is that still the sale you set out to make? Before anyone offers ownership interests to investors, have the attorneys involved check which securities rules apply.
- Part of the price paid to you later. Who owes each payment, is the amount fixed or tied to performance, what security would you hold, and how would those payments be taxed?
The last source needs the most care. When the company or the managers owe you money after closing, getting paid can depend on a business you no longer control. Before you accept it, have your attorney explain your rights if payments stop, including any security and any limits a lender places on paying you, and judge the managers' readiness with that in mind. If an investor would end up in control, compare the offer with the outside buyers in our strategic buyer and private equity guide, because that investor may control decisions even if the managers also own shares.
How do you handle the conflict when your buyers are also your employees?
During negotiations your managers are on the other side of the deal while they still work for you. They know the company's weak points, and they run the results the price is judged on. That position needs ground rules even when the relationship is good.
We would have each side take its own advice from the start. Your attorney acts for you, and the managers should take advice from an attorney of their own before they commit to anything.
Ask your attorney to set the rules for the process: which company information the managers may use for the purchase and who they may share it with, what happens to that information if talks stop, who prepares the figures the price will be based on, how their day jobs stay covered, and what happens to their employment if talks stop. Have the managers review the proposed rules with their own attorney, and write down what you agree before negotiations go further.
Agree also who speaks for the company while talks run. Customers, suppliers and lenders may need to hear from you while the managers negotiate. Employees outside the buying group will have questions about their own future, and our guide to telling your team about a sale covers what to say and when.
Should you test the price with outside buyers first?
We would get an independent basis for judging the price before you commit to the managers. That can be a valuation from an adviser acting for neither side, or a test of what outside buyers would offer.
Credible outside offers let you compare price and terms, and a market test has costs. Information leaves the company, and managers who made an offer in good faith may read an approach to outsiders as a change of heart. Agree at the start whether you will speak to other buyers, and tell the managers what you decided.
If you decide on a wider process, our guide to choosing a business broker or M&A adviser covers who should run it. Ask your attorney what you may promise the managers while alternatives are open, such as a period when you will deal only with them.
What if the buyout falls through?
Agree how talks end before they begin. If the sale does not close, you still own the company, and the managers who tried to buy it are usually still running it the next morning. Some will wonder whether they have a future there. Ask your attorney which obligations survive under anything already signed, such as a confidentiality agreement or a letter of intent.
Our default would be to keep capable managers in their roles and tell each of them so, subject to your attorney's advice. Ask each one directly whether they want to stay. If you are considering a retention arrangement, take it to your attorney and tax adviser before you offer anything.
Tell the people who knew about the talks that they have ended, and confirm who is responsible for what. Then review why talks stopped. A funding gap may close later. We would read a disagreement about who leads as a sign that the team needs more work before anyone revisits ownership.
What should you ask your attorney and tax adviser?
- What you may discuss with the managers before a formal process starts, and what you must avoid promising.
- How the managers' purchase could be structured, and how each structure would be taxed for you.
- What protects you if part of the price is paid after closing, and where you would rank against any lender.
- Who would control the company if an outside investor joins the managers.
- Which employment and benefits questions arise for the managers and for everyone else, and what happens to the managers' employment if talks stop.
- What your own role after closing would be. The terms of that role are covered in staying on after selling.
What should a founder do this quarter?
- Separate the two decisions. Write down whether you want to give up leadership, ownership or both, and what would make you turn a management offer down.
- Set the process with your attorney first. Before any purchase conversation, agree the ground rules and what you must avoid promising, and take the funding questions above to your advisers before any price is discussed.
- Test the team's independence. List the decisions that still depend on you. Delegate operating decisions with clear limits on authority, and review the results before you widen them.
- Ask the managers directly. Hold a separate conversation with each about ownership, with no penalty for declining.
- Treat your managers as a buyer, and judge their offer as you would any other.
- Ask each manager separately whether they want to own the company, and accept a no.
- Close the gap between running a department and running the company before you sell.
- Have your attorney and tax adviser review any part of the price paid to you after closing.
- Agree at the start whether you will talk to outside buyers and what happens if talks stop.
The Leadership Scorecard takes ten minutes and shows which parts of the company still depend on you, which is where your managers' readiness to buy will be tested first.