Management Buy-in (MBI)

What is a management buy-in?

Management buy-in (MBI, in German: Unternehmenskauf durch externes Management) describes the acquisition of a company by an external executive or an external management team that takes over the management with the purchase. The buyers bring capital and management experience, but do not know the company from the inside. As with a management buy-out, the acquisition is usually financed from own capital, bank loans, a vendor loan and, where applicable, equity capital from a financial investor.

The most important use case is business succession among medium-sized companies (Mittelstand): an owner without a successor in the family or in the management sells to a person who wants to continue the company as an entrepreneur. In addition, financial investors install external managers when the previous management leaves with the acquisition. Contractually, the acquisition rests on the purchase agreement, the financing agreements and the arrangements for the handover, such as a consultancy agreement with the previous owner.

Typical buyers and routes to acquisition

• Executives from larger companies who want to become self-employed with their own capital and industry experience.
• Entrepreneurs who acquire a further company and run it themselves.
• Management teams that a financial investor assembles for a particular investment.
• Search funds: an individual raises capital from investors to search for a company, acquires it with their participation and then takes over its management.

For the seller, the selection proceeds differently from a sale to a strategic buyer. Besides price and terms, personal suitability, fit with the workforce and the question of whether the candidate can actually demonstrate the financing all count. Candidates are found through succession exchanges, specialised advisers, banks and industry networks, and in the sales process they are often on the same longlist as strategic buyers.

Difference between management buy-in and management buy-out

In a management buy-out, the information advantage lies with the buyer; in a management buy-in, it lies with the seller. The essential differences follow from this:

• Full review: What a previous managing director knows from first-hand experience, an external buyer must first establish in due diligence, the detailed review before the purchase. This ranges from customer contracts and prices through personnel to the condition of equipment and systems.
• Broader warranties: The buyer demands a more comprehensive catalogue of warranties and indemnities. A warranty insurance (W&I insurance, after Warranty and Indemnity) can limit the seller's liability if the seller no longer wants to stand behind claims after the sale.
• Higher risk from the bank's perspective: Because the buyer has not yet proven themselves in the specific company, banks often require a higher equity share, additional collateral or a larger vendor loan.
• Onboarding risk: The new owner must first get to know customers, suppliers, workforce and processes. In this phase, fluctuations in revenue and earnings are more likely than with an internal change.
• No conflict on the buyer side: Before closing, the external buyer is not a body of the company and is not subject to its duty of loyalty. The position is different if employed executives are to work for the buyer or take a stake in the acquiring company; the rules of the MBO then apply to them.

Handover and onboarding

Whether an MBI succeeds is often decided in the first year after closing. Customers who are personally attached to the previous owner review the business relationship afresh. Employees wait to see whether the new owner proves themselves. And an outgoing owner who is still consulted unintentionally weakens the authority of the successor.

The handover is therefore regulated by contract, often in a consultancy or handover agreement with the previous owner:

• Duration and scope: The involvement ends on a fixed date; transition periods of a few months up to about a year are common.
• Specific tasks: for example, personally introducing the successor to a list of key customers and suppliers by a cut-off date.
• Responsibilities: From closing, the new management decides; the outgoing owner advises but does not instruct.
• Non-compete: A post-contractual non-compete of the seller is, under competition law, generally limited to two years, and to up to three years where know-how is transferred.

The remuneration for the outgoing owner's involvement is agreed separately from the purchase price. It is treated differently for tax purposes: a consultancy fee leads to ongoing income and is not part of the capital gain on disposal. The split between purchase price and fee must therefore correspond to the value of the respective service.

Worked example: earn-out and financing in a management buy-in

A machinery supplier with revenue of EUR 6.5 million is sold to an external managing director from the industry. The purchase price is agreed on a debt-free basis and without excess liquidity (cash-free/debt-free). It amounts to up to EUR 4.0 million: EUR 3.2 million at closing and up to EUR 0.8 million as a performance-based portion (earn-out). This depends on revenue with 20 key customers in months 7 to 18 after closing, that is, over a period of twelve months. The reference is their revenue in the last financial year before the sale, EUR 5.0 million.

• Full payment at at least 95% of the reference revenue, that is, from EUR 4.75 million
• No payment at 75% or less, that is, up to EUR 3.75 million; in between, the payment rises linearly
• Actual revenue with the key customers: EUR 4.4 million, which is 4.4 / 5.0 = 88%
• Share achieved: (88 minus 75) / (95 minus 75) = 13 / 20 = 65%
• Payment from the earn-out: 65% of EUR 0.8 million = EUR 0.52 million
• Total purchase price: 3.2 + 0.52 = EUR 3.72 million

The buyer finances the closing amount with EUR 0.8 million of own capital (25% of EUR 3.2 million), a EUR 1.9 million bank loan and a EUR 0.5 million vendor loan. Together that is 0.8 + 1.9 + 0.5 = EUR 3.2 million. The earn-out is paid later from ongoing cash flow and belongs in the buyer's liquidity planning.

Linking the earn-out to customer revenue aligns the outgoing owner's interest with the success of the handover. The owner receives the full purchase price only if the customers he or she has served remain loyal to the company. Unlike an earnings target, this figure depends hardly at all on decisions by the new owner about costs and investments, over which the outgoing owner no longer has any influence.

Distinctions: MBI, MBO, trade sale and interim management

• Management buy-out: The previous management acquires the company. The review effort is lower, but the buyers' conflict of interest must be regulated.
• Buy-in management buy-out: External executives acquire together with members of the previous management level who contribute knowledge of the company.
• Trade sale: The buyer is an operating company that integrates the target company. Who will run the company in future is less important to the seller.
• Interim management: An external executive takes over leadership for a limited time without taking a stake. Sometimes a later acquisition emerges from it.

Common mistakes

• Handover not set out in the contract. A general promise by the outgoing owner to be available for questions regulates neither tasks nor deadlines.
• Customer concentration not examined. If a large part of revenue falls on a few customers with a personal bond to the owner, this is the largest single risk in an MBI.
• Dual leadership without an end date. If the outgoing owner and the successor lead together for a long time, it remains unclear who decides, and the organisation continues to orient itself towards the outgoing owner.
• Review shortened out of trust. Personal liking does not replace due diligence. Gaps that an external buyer overlooks later fall on the buyer alone, unless a warranty applies.
• No reserve for onboarding. Financing that demands full debt service already in the first year leaves no room for a temporary dip in revenue.
• Non-compete too broad. If it exceeds the duration or scope permitted under competition law, the clause risks being ineffective.

Frequently asked questions

How do entrepreneurs find a suitable MBI candidate?

Through succession exchanges, specialised advisers, banks, chambers of commerce and their own industry network. In a structured sales process, candidates are approached like other buyers and selected on the basis of suitability and proof of financing.

How long should the previous owner keep working after the sale?

A few months up to about a year is common, always with a fixed end date. Longer is rarely sensible, because employees and customers otherwise continue to orient themselves towards the outgoing owner.

How is a management buy-in financed?

Usually from the buyer's own capital, a bank loan and a vendor loan, supplemented for larger transactions by equity capital from a financial investor. In succession cases, promotional loans and guarantees from the guarantee banks (Bürgschaftsbanken) can support the bank financing. Banks often require more equity than in an MBO, because the buyer has not yet proven themselves in the company. A vendor loan reduces this need, because the seller takes on part of the risk.

Is the seller still liable after an MBI?

Yes, within the agreed warranties and indemnities and until they become time-barred. Scope and maximum amounts are a matter of negotiation; a warranty insurance can replace the liability in whole or in part.

What happens if the new owner fails?

That depends on the contracts. Outstanding vendor loans and earn-out payments are then at risk, which is why sellers pay attention to information rights, collateral and clear rules for this case.

The Roemer Capital view

In an MBI, we clarify early whether the candidate can actually demonstrate the financing, with proof of own capital, first conversations with banks and, where applicable, an investor. In parallel, we prepare the data room so that it is ready within 24 hours, because an external buyer needs a complete due diligence.

In the contract, we pay attention to a concretely regulated handover. It sets out which customers the outgoing owner introduces by when and from which date the owner is no longer in the business. Part of the purchase price is tied to these customers remaining. Contract drafting lies with the law firm; we help calculate the economic mechanics.