Guide · 11 min read
How a management buyout is structured: the newco that buys the shares, senior debt, vendor loan notes, institutional and sweet equity, security and the shareholders agreement.
Written by Matt Lenzie · Published 3 September 2026
Advice from Matt Lenzie · 25-year career banker (Bank of Scotland, Lloyds Banking Group). £400m+ raised for clients.
Founder profile →A management buyout structure is the arrangement of companies, funding layers and agreements that lets a management team buy the business they run using that business as the source of repayment. At its centre is a newly incorporated holding company: newco borrows, newco buys the shares of the trading company, and the trading company then services the debt out of its own cash flow. Everything else in the structure exists to answer two questions. Who gets paid first if it goes wrong, and who controls the decisions while it goes right.
Those two questions are worth separating, because teams tend to conflate them. Ranking is about enforcement: the order in which claims are satisfied. Control is about governance: who can appoint directors, veto decisions and force a sale. A vendor with a large loan note has a big claim and almost no control. A private equity investor with a minority of the ordinary shares has a modest claim on the ordinary and a great deal of control. Understanding which is which is most of what a management team needs from a structure conversation.
This guide sets out the newco, the funding layers and how they rank, the security each funder takes, and the shareholders agreement that divides control. For the mechanics in sequence, read how a management buyout works; for the calendar, our management buyout process guide.
Newco is a company incorporated for the transaction, sometimes described as a special purpose vehicle, with the management team as its shareholders and, where relevant, the institutional investor alongside them. It does four jobs that personal ownership cannot.
Almost every UK management buyout is a share purchase rather than an asset purchase for the same reason: buying the company keeps the trading history that customers value and lenders underwrite. Asset purchases appear mainly in carve-outs where there is no clean company to buy, and they bring contract novations, employee transfers and the loss of that history.
The stack is best read as a queue. Each layer accepts a worse position than the one above it and is paid more for accepting it, and the vendor loan note is cheap precisely because the vendor is the party with the least commercial choice about where they sit.
| Layer | Rank on enforcement | Typical share of the price | Indicative all-in cost, September 2026 |
|---|---|---|---|
| Senior bank term debt | First, secured by debenture, share charge and cross guarantees | 40% to 55% | 7% to 10% all-in |
| Specialist cash flow or unitranche loan | First, as the single senior layer where a bank is not used | 45% to 60% | 9% to 14% all-in |
| Asset based facilities: invoice finance, stock, plant, property | First over the assets financed, ranked against senior by deed of priority | 10% to 25% | 6% to 10% plus facility fees |
| Mezzanine or subordinated debt | Second, behind all senior debt | 5% to 15% | 12% to 18% including any PIK element |
| Vendor loan notes and deferred consideration | Third, subordinated to every bank layer, usually with a standstill | 15% to 35% | 5% to 8% |
| Institutional equity: preference shares and investor loan notes | Behind all debt, ahead of ordinary shares | 30% to 50% where private equity is involved | Return taken at exit, not as a running coupon |
| Management ordinary shares, the sweet equity | Last | 5% to 15% of the price in cash from the team | No coupon; the return is the exit value |
The percentages are indicative bands as at September 2026 and they deliberately do not sum to 100%, because several rows are alternatives rather than additions. A bank-funded deal uses row one and rarely row two. A unitranche deal uses row two instead of row one and often skips row four. A private equity deal uses rows six and seven and may use none of the vendor loan. What holds across all of them is that senior debt in a UK management buyout runs at 2.0x to 3.0x EBITDA, and total debt at 3.0x to 4.5x EBITDA once vendor loans or mezzanine are included.
Senior debt is the largest and cheapest third-party layer, and its shape matters as much as its size. Four features to negotiate rather than accept.
A term loan of four to six years, repaid in equal quarterly instalments, sometimes with a modest balloon at the end. The profile is where cash flow is won: stretching a £3 million loan from five years to six reduces annual capital repayment by around £100,000, which is £100,000 of covenant headroom and dividend capacity. Some funders will offer a capital repayment holiday for the first six or twelve months, which is worth more to a business absorbing working capital in year one than a slightly finer margin.
Most structures include a revolving credit facility or overdraft for working capital, and sometimes a separate capital expenditure line. Funding day-one working capital out of the term loan, and then discovering the business needs a facility it has no capacity left for, is a common and avoidable structuring error.
Expect a debt service cover ratio tested against free cash flow, typically at around 1.3x in this market, a leverage covenant capping total debt to EBITDA on a declining schedule, and often a capital expenditure limit. The definitions matter more than the levels: what counts as EBITDA, whether exceptional items are added back, whether the test is on the last twelve months or the financial year. A generous level on a tight definition is worse than the reverse.
Margin over Bank Rate or SONIA, plus an arrangement fee, plus a non-utilisation fee on undrawn commitments. Indicative all-in pricing sits at 7% to 10% for senior bank debt and 9% to 14% for specialist cash flow lending as at September 2026. Our management buyout loans page covers both, and the lender panel sets out who lends against what.
Alongside the senior layer rather than beneath it, and they are sized on a different question. A cash flow lender asks what the business earns; an asset based lender asks what the business owns. That produces a facility built from a borrowing base: an advance against eligible trade debtors, plus term facilities against stock, plant and machinery and property, with availability recalculated as the assets turn over.
For manufacturers, distributors, hauliers and recruiters, asset based lending frequently releases more than a cash flow loan against the same EBITDA, and it has a structural advantage in a buyout: the receivables facility funds working capital permanently, so the term debt can be dedicated to the price. The trade-offs are reporting intensity, monthly reconciliations and audits, and concentration limits that reduce availability where one customer dominates the book. Where an asset based lender and a term lender both take security, a deed of priority allocates the assets between them: typically the asset based lender takes first ranking over debtors and stock, the term lender over everything else. Our page on asset based lending for an MBO covers the advance rates.
A vendor loan note is the seller lending part of the price back to the buyer. It is documented as a loan note instrument or as deferred consideration in the share purchase agreement, repaid over three to five years, and it commonly funds 15% to 35% of the price at indicative coupons of 5% to 8% as at September 2026.
Three terms decide whether a senior lender will tolerate it, and they are usually non-negotiable from the bank's side:
Handled well, vendor finance is the most useful layer in the structure. It closes the gap between debt capacity and price more cheaply than mezzanine and far more cheaply than equity, and it sends a credit committee a signal nothing else can: the person who knows this business best is content to be paid out of its future. Our page on vendor finance for a management buyout covers the negotiation, and the vendor loan note calculator models the repayment schedule and total cost.
Where the gap between debt capacity and price is too large for a vendor note, an institutional investor fills it. Names active in the UK lower mid-market include BGF, LDC, Maven Capital Partners, Mercia, Foresight Group, Palatine, YFM Equity Partners and Connection Capital. What matters structurally is not the percentage they take but the instrument they take it in.
An investor typically subscribes for a small number of ordinary shares and puts the bulk of its money in as preference shares or investor loan notes carrying a fixed return. Those instruments rank ahead of the ordinary shares, so on an exit the investor recovers its capital and accrued return first, and only the balance is shared between the ordinary shareholders. The management team subscribes for ordinary shares at a low price, which is the arrangement the market calls sweet equity.
The consequence is gearing. Because the investor's money sits in the preference layer, every pound of value created above the investor's entitlement flows disproportionately to the ordinary shares. A team holding 20% of the ordinary in a preference-heavy structure can end up with a larger share of the upside than a team holding 50% of a flat structure, and a smaller share of a poor outcome. Two mechanisms usually sit alongside it:
Our page on private equity backed management buyouts covers the partnership itself, and our guide to management buyout tax implications covers the employment-related securities rules in more detail.
Comprehensive security, taken at completion and registered afterwards. The standard package:
Charges created at completion must be registered at Companies House within 21 days, and the stock transfer forms go to HMRC for stamping at 0.5% of the consideration for the shares (HMRC). Both are administrative and both have caused real problems when missed.
The articles of association and the shareholders agreement are where governance lives, and on any deal with more than one shareholder group they matter as much as the debt documents. The provisions to understand:
Our guide to the management buyout agreement covers these documents alongside the share purchase agreement and the facility documents.
The same architecture, at three different levels of complexity.
Below about £5 million enterprise value, the structure is usually a single senior lender, an invoice finance facility, a substantial vendor loan note and cash from a small team, with the team owning all of the ordinary shares. Personal guarantees are close to universal. There is no institutional equity, no intercreditor agreement beyond a simple deed of priority, and the shareholders agreement is short because the shareholders are all managers. Our shareholder and partner buyout finance page covers the smallest deals, where a company purchase of own shares sometimes replaces the newco entirely.
Between roughly £5 million and £20 million, the options widen. A unitranche facility from a specialist lender may replace bank senior and mezzanine with one instrument and one covenant set. Institutional equity becomes available, which changes the share structure to include preference instruments and brings a proper shareholders agreement, ratchets and leaver provisions. Asset based facilities are frequently combined with cash flow debt.
Above about £20 million, the structure starts to resemble a sponsor-led leveraged buyout: several debt tranches, a full intercreditor agreement, warranty and indemnity insurance in place of vendor warranty exposure, and governance driven by the equity investor. For that end of the market our sister site LeveragedBuyoutFinance.co.uk covers leveraged acquisition structures specifically, and our guide comparing a management buyout with a leveraged buyout sets the two approaches side by side.
Whatever the size, the test of a structure is the same and it is not the headline leverage. It is whether the business can service the whole stack through a bad year without breaching a covenant, and whether the people who will run it understand what they have signed. Model your own version in the management buyout funding structure calculator, and see three worked structures at different deal sizes in our management buyout examples guide.
A newly incorporated holding company, usually called newco, buys the entire share capital of the trading company. Newco is funded in layers that rank in a defined order: senior debt and asset based facilities first, secured by a debenture over the trading company and a charge over its shares; mezzanine or subordinated debt next where it is used; the vendor loan note behind all bank debt under a deed of priority; institutional equity behind that as preference shares and loan notes where a private equity investor is involved; and management ordinary shares last. A shareholders agreement governs control, and the trading company services the whole structure from its own cash flow.
Because the borrowing and the asset it bought have to sit in the same entity. Newco borrows, newco pays the vendor, and newco owns the trading company, which lets the funder take a charge over both the shares and the underlying assets. Newco also puts the acquisition interest where it can be relieved against group profits, gives several buyers and any investor a clean capital structure with different share classes, and keeps the acquisition debt above the trading company rather than inside it. Buying the shares personally achieves none of those things.
Sweet equity is the management team's ordinary shares in a private equity backed structure, subscribed for a small amount of cash while the investor puts most of its money in as preference shares or loan notes that rank ahead. Because the investor takes the first slice of any exit proceeds through those instruments, the ordinary shares appreciate disproportionately once the investor return is covered. That gearing is the point: a modest ordinary percentage can be worth considerably more than the same cash invested in a flat capital structure. It is normally coupled with a section 431 ITEPA election and, frequently, a ratchet that adjusts the split by outcome.
A debenture creating fixed and floating charges over the trading company's assets, a legal charge over any freehold or long leasehold property, a share charge over newco's shares in the trading company, cross guarantees between the companies in the new group, and personal guarantees from the buying directors on most bank and cash flow deals. Where there is more than one lender, an intercreditor agreement or deed of priority sets out who ranks where and what the junior lender may do on a default. Charges must be registered at Companies House within 21 days of creation.
Feasibility and debt capacity modelling, the approach to the owner and an outline on price, building the funding structure and sources and uses, indicative terms from funders, heads of terms with exclusivity, credit approval alongside financial and legal due diligence, negotiation of the share purchase agreement and the funding documents, completion and drawdown, then the first reporting cycle under the new covenants. Our management buyout process guide sets out how long each stage takes and who is involved.
Structurally they are close cousins, and the difference is degree rather than kind. Both use a newco, both secure debt on the target and both service it from the target's cash flow. A sponsor-led leveraged buyout typically pushes leverage further, may use several tranches of senior and junior debt with an intercreditor agreement between them, and places control firmly with the financial investor. A management buyout is usually a simpler stack, a single senior lender plus a vendor note, with management holding the ordinary shares and living with the covenant directly.
The structure concentrates risk on the people least able to diversify it. The trading company carries debt raised to buy its own shares, so its cash flow is committed for four to six years. The directors sign personal guarantees, which is where limited liability stops. Where institutional equity is involved, the shareholders agreement gives the investor reserved matters, board representation and a route to force an exit, and the leaver provisions mean a manager who resigns early can lose most of the value they have built. None of that is unfair, but it should be understood before signature rather than after.
This guide is general information about unregulated business finance, not tax, legal or investment advice. Lenzie Consulting Ltd is not authorised or regulated by the FCA; we arrange unregulated business finance for limited companies and LLPs only. To discuss how a specific deal would be structured and funded, see management buyout finance or get in touch through the contact page.
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