Management Buy-out (MBO)

What is a management buy-out?

Management buy-out (MBO, in German: Unternehmenskauf durch das Management) describes the acquisition of a company or part of a company by its existing management or senior employees. The buyers take over the majority or all of the shares and continue to run the company as owners. Because their own assets are usually not enough for the purchase price, the acquisition is financed predominantly with debt and often together with a financial investor. Such a predominantly debt-financed purchase is called a leveraged buy-out.

MBOs occur mainly in three situations. An owner-managed company has no successor in the family (business succession), or a corporate group divests a business unit. In the third case, a financial investor exits and passes its stake on to the management and a new investor. The acquisition is governed by a share purchase agreement, the financing by loan and investment agreements, and the relationship of the buyers among themselves by a shareholders' agreement.

Structure and financing of an MBO

In practice, the buyers set up an acquisition vehicle that buys the shares in the target company. The financing is built up in layers:

• Management equity: Measured against the purchase price, the amount is often small, but it is meant to bind those involved in a personally noticeable way. Banks and investors see it as proof that the management shares in the risk.
• Equity capital from a financial investor: If an investor participates, it provides the largest part of the equity, often partly as a shareholder loan or preferred capital that is repaid with priority. The management therefore often receives a higher share of the ordinary shares without preference (common equity) than its contribution corresponds to.
• Bank loan: Senior acquisition financing to the acquisition vehicle, secured by the acquired shares and, where applicable, by assets of the target company, with fixed repayment and financial ratios (covenants).
• Vendor loan: The seller defers part of the purchase price, usually subordinated to the bank. In succession cases this is common, because it closes the financing gap and shows the seller's confidence in the management.
• Mezzanine capital: Subordinated funds between equity and debt, where bank loans and equity are not enough.

Capital maintenance and collateral

The acquisition financing is repaid from the earnings of the target company, because the acquisition vehicle has no business of its own. It services interest and repayment from distributions of the target company, from transferred profits if both have concluded a profit and loss transfer agreement, or, after a merger, directly from the joint result. If the target company provides collateral for the loans of its acquirer, Section 30 of the German Limited Liability Companies Act (GmbHG) sets limits: assets that are required to maintain the share capital may not be paid out to shareholders. Loan agreements therefore restrict the enforcement of such collateral by contract. For stock corporations, loans and collateral from the company for the acquisition of its own shares by third parties are largely prohibited under Section 71a of the German Stock Corporation Act (AktG).

Conflict of interest and information advantage

In an MBO, the buyer stands on both sides. The management runs the company in the interest of the company and at the same time negotiates the price as acquirer. It knows planning, risks and opportunities better than any third party, often better than the seller itself, and influences how the current financial year develops and how it is presented.

Legally, the buyers remain bound by their duty of loyalty as managing directors for as long as they are in office, that is, precisely during the negotiations. They may not exploit business opportunities of the company for themselves and are subject to confidentiality; the unauthorised disclosure of trade secrets is a criminal offence under Section 85 GmbHG. They may therefore pass information to banks and investors only with the consent of the shareholders. In practice, the conflict is regulated as follows:

• The shareholders expressly release the passing of information to financing partners and determine its scope.
• The seller has the company valued independently or runs an auction process with further interested parties.
• The management declares in the purchase agreement that it is not aware of any material undisclosed circumstances. In return, the seller's warranties are often narrower, because the acquirer knows the company.
• Between signing and closing, rules apply for continuing the business in the ordinary course.

The conflict becomes particularly clear when the management buys not shares but a business unit from the company itself (asset deal). The managing director would then stand on both sides of the same contract. Such self-dealing is permitted under Section 181 of the German Civil Code (BGB) only if it has been authorised. In practice, another managing director or a representative appointed by the shareholders' meeting therefore represents the company.

Tax aspects of an MBO

The general rules apply to the seller. If the seller holds the shares as private assets and has a stake of at least 1%, 60% of the gain is taxable under Section 17 of the German Income Tax Act (EStG) (partial income method). If a holding GmbH sells, 95% of the gain is tax-exempt under Section 8b of the German Corporation Tax Act (KStG). For sole proprietorships, the rules on the disposal of a business apply.

On the acquirer side, the acquisition vehicle is often merged with the target company or linked through a profit and loss transfer agreement that must be concluded for at least five years (tax group, Organschaft). This allows the interest on the acquisition financing to be offset against operating profits. The interest barrier rule limits the deduction of high interest expenses. It applies only when interest expenses exceed interest income by at least EUR 3 million a year (as of 2026), and therefore mainly affects larger transactions. For the management stake, the valuation must be documented: if executives acquire their shares below market value, the difference can be treated as employment income.

Worked example: financing a management buy-out

An industrial services provider achieves EBITDA (earnings before interest, taxes, depreciation and amortisation) of EUR 1.2 million. As part of a succession, it is sold for EUR 6.0 million to its two managing directors, debt-free and without excess liquidity (cash-free/debt-free). The buyers set up an acquisition vehicle and bring in a financial investor.

• Management equity: EUR 0.6 million (10%)
• Financial investor equity: EUR 1.8 million (30%)
• Bank loan: EUR 2.7 million (45%), term six years, constant repayment, 7% interest
• Vendor loan: EUR 0.9 million (15%), subordinated, 5% interest, bullet repayment after six years
• Total: 0.6 + 1.8 + 2.7 + 0.9 = EUR 6.0 million

Debt service, that is, interest and repayment, in the first year:

• Repayment of bank loan: 2.7 / 6 = EUR 0.45 million
• Interest on bank loan: 7% of 2.7 = EUR 0.189 million
• Interest on vendor loan: 5% of 0.9 = EUR 0.045 million
• Total debt service: 0.45 + 0.189 + 0.045 = EUR 0.684 million
• Available for debt service: EUR 1.2 million EBITDA minus assumed income taxes and replacement investments of EUR 0.4 million together = EUR 0.8 million
• Debt service coverage: 0.8 / 0.684 = around 1.17

The debt service coverage shows how many times the available funds cover the debt service; 1.17 leaves a buffer of only 17%. If the bank requires a debt service coverage of at least 1.3, the debt service may not exceed 0.8 / 1.3 = around EUR 0.615 million. After deducting the interest on the vendor loan, EUR 0.57 million remains for the bank loan. For each EUR 1 million of bank loan, 1/6 + 0.07 = around EUR 0.237 million falls due in the first year. A bank loan of 0.57 / 0.237 = around EUR 2.4 million is therefore sustainable, around EUR 0.3 million less than planned. The gap has to be closed by more equity, a higher vendor loan or a lower purchase price. In an MBO, it is therefore the debt service capacity that limits the purchase price.

Distinctions: MBO, MBI, trade sale and financial investor

• Management buy-in: The buyers come from outside and take over the management for the first time with the acquisition. The information gap runs the other way round.
• Buy-in management buy-out: A hybrid form in which the previous management acquires together with external executives.
• Trade sale: Sale to a strategic buyer that can realise synergies, that is, value advantages from combining the two companies, and may therefore pay more. In return, it gains deep insight into figures and customers.
• Private equity: Equity capital from financial investors, which in larger MBOs provides the bulk of the equity.

Common mistakes

• Purchase price without a financing check. A price that the company cannot service endangers the buyers, the bank and the seller with a deferred part of the purchase price alike.
• Conflict of interest not regulated. Without releases and information rules, distrust arises in precisely the relationship that is meant to carry on after the sale.
• No agreement among the buyers. Several executives buying together need a shareholders' agreement with rules on decisions, leaving and transfer of shares.
• Collateral without capital protection. If assets of the target company are provided as collateral without restriction, breaches of Section 30 GmbHG and personal liability of the management are a risk.
• Vendor loan without rights. Without information rights, an interest provision and a clear ranking, the seller bears the risk of an equity provider without its influence.
• Dependence on the previous owner underestimated. If the largest customers are personally attached to the previous owner, a regulated handover of these relationships is needed.

Frequently asked questions

How much equity does the management have to contribute?

There is no fixed rate. Banks and investors pay less attention to the share of the purchase price than to whether a loss would hit the buyers in a personally noticeable way.

May the management show banks internal figures before the shareholders have agreed?

No. Managing directors are bound by confidentiality. The shareholders must be informed of the interest in buying and must release the passing of internal information to banks or investors.

What are the advantages and disadvantages of a management buy-out?

The most important advantage is continuity: the buyers know the business, customers and workforce, the review is shorter, and no competitor gains insight into figures and customers. Disadvantages are a usually lower price, because no synergies arise and the financing limits the price, and the debt that the company carries after the purchase. The seller must regulate the buyers' conflict of interest and often defer part of the purchase price.

Can the seller remain a shareholder after an MBO?

Yes, through a reinvestment in the acquisition vehicle. If the seller then holds more than 10%, a loan granted by the seller can rank behind other creditors in insolvency as a shareholder loan (Section 39(1) no. 5 of the German Insolvency Code, InsO).

What happens if the company cannot carry the debt service?

The acquisition vehicle then generally breaches its financial ratios, and the bank can demand renegotiation or additional collateral. The subordinated vendor loan is usually the first to be deferred in this situation.

The Roemer Capital view

In an MBO, we calculate the purchase price from the financing side. The starting point is the debt service that the company carries in the cautious case of the financial model; from this, the financeable price follows at realistic bank terms. This figure is fixed before price expectations are discussed.

In succession mandates, we make sure the conflict of interest is regulated openly: clear releases for passing on information, a traceable valuation and, where sensible, further interested parties as a benchmark. The law firm is responsible for the contracts; we prepare the financing documents and support the talks with banks and investors.