MBO, MBI and BIMBO explained, and how each one funds

Three structures, one real question

The three acronyms describe who is buying, and that is the whole of the difference between them.

MBO, a management buy-out. The existing management team buys the business it already runs, usually from a retiring owner or a parent company that wants out of that market.
MBI, a management buy-in. An outside manager or team buys the business and moves in to run it. The buyer knows the sector, or knows management, but does not know this business.
BIMBO, a buy-in management buy-out. A hybrid. Part of the existing team stays and takes equity, and an incoming manager or team joins them and takes the rest.

Behind the labels a lender is asking one question in all three cases: after completion, who is actually going to run this business, and is there evidence they can? Everything else in the credit assessment follows from the answer, which is why the same target with the same accounts can be comfortably fundable with one team behind it and declined with another.

The management buy-out, and why lenders start warm

An MBO is the most straightforward of the three to fund, for reasons that have nothing to do with the paperwork. The people buying have been running the business, often for years. They know the customers, the staff and the seasonality, and their forecast is a continuation of what they have already been doing rather than a projection built by someone looking in from outside. Customer relationships are already theirs, so the risk that value walks out with the seller is smaller.

It also tends to be the cleanest transaction for everyone. Confidentiality is easier because the buyer is already inside. Diligence is shorter because the buyer knows where the problems are. It is normally a share purchase, since continuity of the trading entity is the point, and the reasons that matters are set out in share purchase versus asset purchase.

The soft spots are real, though, and lenders look for them. Managers are often excellent operators and have never held the whole commercial risk. A team that has run production, service delivery or a branch network may never have owned a covenant, a repayment schedule or a working capital cycle. And an owner-manager who is selling out of a business that depends on them personally leaves a hole that the management team has to be able to fill.

The management buy-in, and the risk that sits at its centre

An MBI is the same transaction with a stranger at the controls, and every lender prices that. The buyer may be highly capable and may have run something larger, and they still do not know this business, these customers or these staff, and the staff do not know them.

What a lender is looking for to get comfortable is consistent:

Directly relevant experience. Not general management, but this sector, this size of business and ideally this operating model. Someone who has run a maintenance contract book understands why the renewal rate matters. Someone who has not will find out in month four.
A real handover. The seller staying on for a defined period with introductions actually diarised, not offered as a courtesy. An unwritten promise of help is worth nothing in a credit paper.
A second layer that stays. If the operations manager, the contracts manager or the senior technicians are staying, the business keeps working while the new owner learns it. If they are leaving too, the deal is much harder.
More of the buyer's own money. Where the lender is taking more risk on the person, it wants more of that person's capital in front of its own. What counts as contribution and where it can come from is covered in equity contribution.

An MBI into a business where the customer relationships belong personally to the departing owner is the hardest version of this, and it is common in owner-managed trade services. The answer is usually structural rather than persuasive: more of the price deferred, tied to the customers who actually stay.

The BIMBO, and why it often funds better than either

A BIMBO puts continuity and new capability in the same deal. Part of the existing team stays and puts money in, so the customers see familiar faces and the operational knowledge does not leave. The incoming buyer brings whatever the business was missing: capital, commercial discipline, a growth plan, or simply a successor to an owner who wants to retire.

Lenders tend to like the shape for exactly that reason. The continuity argument is evidenced rather than asserted, and the incoming party has been chosen by people who know what the business needs. It also spreads the equity requirement across more than one pocket, which frequently makes a deal affordable that neither party could have done alone.

The complications are human rather than financial. Two groups with different amounts of money, different amounts of knowledge and different expectations about who is in charge have to agree how decisions get made before completion, not after. The shareholders' agreement is the document that does that work, and it deserves proper attention rather than a template.

How all three are funded

The building blocks are the same in each case, and the proportions move with the risk.

Senior term debt is almost always the largest single piece, sized against the rebuilt profit figure rather than the headline price. The team's own contribution sits underneath it. Money left in by the seller usually sits alongside it and does a great deal of work in these deals, both because it reduces the borrowing required and because it tells the lender the seller believes the business will survive their departure: that is vendor and seller finance, and how a lender reads the ranking of it is covered in vendor finance.

Where a gap remains, it can be filled with mezzanine or with external equity, and both cost considerably more than the alternatives. At the size of business most of these deals involve, the honest position is set out in mezzanine in an SME context: it is often the wrong answer, and the cheaper conversation is usually with the seller. How the pieces rank against each other, and the order lenders expect to see them, is stacking facilities.

One facility gets forgotten in management deals more than in any other, because the buyers know the business and assume the cash cycle will look after itself. It will not. The salaries land immediately and the receipts arrive on the usual timetable, which is what working capital exists to cover.

What the team will be asked about themselves

In every other kind of acquisition the target is the subject of the credit paper. In a management deal the team is half of it.

Full CVs, with what each person has actually been responsible for rather than job titles.
Who fills each role after completion: sales, operations, finance, compliance. A team with no one owning the numbers is a common gap.
Each individual's contribution, where it is coming from, and whether any of it is itself borrowed.
The personal position of each buyer, since personal guarantees are normal in these deals. What one looks like in practice is set out in personal guarantees explained.
The shareholders' agreement, and what happens if one of the team leaves.
What the seller is doing after completion, for how long, and on what terms.

What goes wrong

The team cannot afford the price they agreed. Management teams frequently negotiate a price with the owner they work for before anyone has tested what the business will support in debt. Doing it in that order means renegotiating with someone you have to keep working alongside.

The seller wants all the money at completion. In an MBI particularly, a lender will want the seller carrying some of the risk of their own departure. A seller who refuses is telling everybody something.

Nobody agreed how the team makes decisions. The shareholders' agreement is not paperwork. It is the mechanism for the argument that has not happened yet.

The buy-in manager underestimates the first year. Learning a business while servicing new debt is the hardest year the company will have. What that period actually demands is set out in the first hundred days.

Key people were never asked. A deal that depends on the operations manager staying, put together without anyone establishing whether they intend to, is a deal with an unexamined assumption at its centre.

Getting a management deal in front of the right lender

Management transactions are assessed on people as much as on numbers, and that assessment is not mechanical. A lender that has funded buy-outs in HVAC or in accountancy practices knows what a credible team looks like in that setting. A lender that has not will fall back on the accounts and on whatever it makes of the CVs.

We know this market and we know specific people who have funded management deals in these sectors before. Tell us who is buying, what they have run, and how the business trades, and we come back to you having spoken to them.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.