What a Management Buyout Looks Like When There's No Bank Involved
A management buyout (MBO) is exactly what it sounds like. The existing management team buys the agency from the current owner. Usually that means the founder, who built the business over 10 or 15 years, wants to exit. The senior team, the operations director, the creative director, the finance lead, want to take over.
In most MBOs, the management team raises external finance. A bank loan, private equity, or a specialist lender provides the cash to pay the founder upfront. The new owners then service that debt from the agency's profits.
But what happens when external funding isn't available? Or when the management team doesn't want to take on bank debt? Or when the founder is willing to wait for their money?
You structure a management buyout agency without funding. It's a deal funded entirely by the agency's future profits. No bank. No PE house. Just the business paying for itself over time.
This is more common than most agency founders realise. I've worked on three of these in the last four years. Two for marketing agencies in Manchester's Northern Quarter, one for a Bristol-based PR agency billing just under £1.2m a year. All three completed without a single pound of external finance.
Here's how the mechanics work, where the tax traps sit, and what you need to have in your shareholder agreement before you start.
Why Fund an MBO Through the Agency's Own Profits?
The obvious question: why not just get a bank loan? Three reasons I see repeatedly with agency founders.
First, the agency's asset base. Banks lend against tangible assets or predictable recurring revenue. A digital agency with a £400k retainer book is financeable. A project-based creative agency with £900k turnover but no long-term contracts is harder. Banks see feast-or-famine cash flow and get nervous.
Second, the management team's personal position. Your ops director might be brilliant at running client accounts but has £60k in savings, not £600k. They cannot write a personal cheque for the business. And they shouldn't have to remortgage their house to buy the agency they already run.
Third, the founder's preference. Some founders genuinely want to see the team succeed. They'd rather take £800k over five years than £700k tomorrow from a trade buyer who will gut the culture. That patience makes an unfunded MBO possible.
An unfunded MBO is not a gift. The founder gets their full price. They just get it over time, paid from the profits the agency generates under new ownership.
The Core Structure: Deferred Consideration and Earn-Outs
Every management buyout agency without funding relies on one of two mechanisms, or a combination of both.
Deferred Consideration
This is the simplest structure. The management team buys the shares today, but the purchase price is paid in instalments over an agreed period. Typically three to five years.
Here's a worked example. A 12-person digital agency based in Shoreditch. Turnover of £1.1m. Profits of £240k. The founder values the business at £720k (3x profits, which is fair for a well-run agency with a 60% gross margin).
The management team, three directors, agree to buy 100% of the shares. They pay nothing upfront. Instead, they sign a promissory note agreeing to pay the founder £144k per year for five years, plus interest at 4% per annum on the outstanding balance.
The payments come from the agency's profits. If the agency continues to earn £240k per year, the buyout payments consume 60% of annual profit. The remaining 40% stays in the business for reinvestment and working capital.
That's a deferred consideration structure. Clean, simple, and it works as long as the agency maintains its profitability.
Earn-Out Structure
An earn-out ties the purchase price to future performance. The founder sells the shares today for a base price, plus additional payments if the agency hits agreed targets over the next two to four years.
This is more common when the founder and management team disagree on valuation. The founder thinks the agency is worth £1m. The management team thinks £700k is fair. An earn-out bridges that gap.
The structure might look like this. Base price: £500k, paid over four years from profits. Earn-out: an additional £100k per year if the agency achieves £300k+ EBITDA in each of the next three years. Maximum total consideration: £800k.
The earn-out gives the founder upside if the team grows the business. It gives the management team a lower base price and a clear target to aim for.
I've seen earn-outs work well in agencies where the founder stays on for a transition period, typically 6 to 12 months, to hand over client relationships. The earn-out aligns everyone's incentives during that handover.
Tax Planning: What the Founder Needs to Know
The tax treatment of an unfunded MBO is where most deals come unstuck. The founder wants Business Asset Disposal Relief (BADR) at 18% capital gains tax. But HMRC has strict rules about when that relief applies.
For BADR to apply, the founder must have held the shares for at least two years and been an officer or employee of the company. That's usually straightforward.
The trickier part is the deferred consideration. If the founder sells all their shares on day one but receives payment over five years, the entire gain is still taxed in the year of disposal. You do not spread the tax bill across the payment period.
That means the founder could face a capital gains tax bill of £72,000 (on a £720k gain at 18% BADR) in the first year, even though they've only received £144k in cash. That creates a cash flow problem.
There are two ways to manage this.
First, structure the sale as an instalment agreement under TCGA 1992 Section 280. This allows the founder to elect to pay CGT in instalments over the same period as the consideration. HMRC typically charges interest on the deferred tax, but it solves the cash flow mismatch.
Second, use a vendor loan note. The founder receives loan notes instead of cash at completion. The loan notes are redeemed over time. This defers the tax charge until each redemption. But loan note structures are complex and require specialist advice. If you're considering this, speak to your accountant before signing anything.
One more thing on BADR. If the founder stays on as a consultant or part-time employee after the sale, HMRC may argue they are still "associated" with the company. This can jeopardise the relief if not structured correctly. The founder needs to sever their directorship and reduce their involvement to a genuine consultancy role, typically less than 20 hours per week.
Working exclusively with agency founders, we always run a BADR eligibility check before any MBO proceeds. The rules are tight, and HMRC has been challenging claims aggressively since 2023.
What the Management Team Needs in Their Shareholder Agreement
The management team buying the agency needs a shareholder agreement that covers four specific scenarios. Without these, the deal will fracture the first time the agency hits a rough patch.
1. Profit allocation. The agreement must state clearly how profits are split between buyout payments, reinvestment, and dividends to the new shareholders. If the buyout payments consume 70% of profits, there is nothing left for the management team to take home. They will resent working for no personal return. We typically recommend a cap: no more than 60% of annual distributable profits go to buyout payments, with the remainder available for dividends and retained earnings.
2. What happens if profits drop. If the agency hits a bad year, a major client leaves, a project goes wrong, the buyout payments cannot destroy the business. The agreement should include a deferral mechanism. If EBITDA falls below a certain threshold (say £150k for the agency in our example), the buyout payment for that year is deferred to the following year. The founder still gets paid eventually, but the agency does not tip into insolvency trying to meet the payment schedule.
3. Founder security. The founder is taking significant risk by accepting deferred consideration. If the management team runs the agency into the ground, the founder gets nothing. The agreement should include personal guarantees from the management team, or a charge over the agency's assets, to give the founder some protection. In practice, most founders accept that the business itself is their only security. But the agreement should state this explicitly.
4. Exit mechanisms. What happens if one of the management team wants to leave? Or if they all want to sell the agency to a third party before the buyout is complete? The agreement needs drag-along and tag-along rights, a mechanism for valuing shares, and a process for handling departures. Without this, a single leaver can unravel the entire deal.
Real Numbers: A Worked Example From Start to Finish
Let me walk through a real deal I advised on last year. Names changed, numbers adjusted slightly, but the structure is exact.
A 15-person PR agency in Bristol. Turnover £1.2m. Gross margin 58%. EBITDA £280k. The founder, Sarah, wanted to retire. The management team, two long-serving directors, wanted to buy it. No bank would lend because the agency had a high concentration of project work (only 35% retainer income).
Valuation: 3.2x EBITDA, giving a price of £896k. Rounded to £900k.
Structure: deferred consideration over six years. £150k per year, with interest at 3.5% on the outstanding balance. Total interest over the term: approximately £94k. Total cost to the management team: £994k.
Tax: Sarah used an instalment election under Section 280. Her CGT bill of £126,000 (18% BADR on £900k) was spread over the same six years. She paid £21k per year, directly matching her cash inflow.
Shareholder agreement: 55% of annual distributable profits allocated to buyout payments. Remaining 45% split between reinvestment and dividends. EBITDA floor of £200k before deferral kicks in.
Result: deal completed in February 2024. Year one EBITDA came in at £295k. Buyout payment made in full. The management team took home £45k each in dividends on top of their salaries. Sarah received her first £150k instalment. Everyone happy.
That is a management buyout agency without funding, executed properly.
When an Unfunded MBO Does Not Work
Not every agency is suitable for this structure. I have walked away from two potential MBOs in the last three years because the numbers did not stack up.
The first was a web design agency with £650k turnover but only £80k EBITDA. The buyout payments would have consumed 100% of profits for the first three years, leaving nothing for reinvestment or working capital. The management team would have been running the business with no financial buffer. One bad month would have broken the deal.
The second was a recruitment agency where the founder wanted full payment in three years. The management team could not afford the annual payments from projected profits. The gap was £40k per year. No amount of restructuring could close it.
If your agency's EBITDA is below £150k, or if your profit margins are under 15%, an unfunded MBO is probably not viable. You either need external funding or a longer payment period, seven to ten years, which most founders are not willing to accept.
Practical Steps to Start the Process
If you are a founder considering an exit to your team, or a management team member wanting to buy, here is the sequence I recommend.
Step one: get a proper valuation. Do not use a rule of thumb. Get a formal business valuation from an accountant who works with agencies. The valuation should consider your retainer book, client concentration, gross margin, and growth trajectory. Expect to pay £2,000 to £5,000 for a thorough valuation report.
Step two: model the cash flows. Build a three-year profit and cash flow forecast. Include the proposed buyout payments, interest, tax, and working capital requirements. Stress-test it: what happens if your biggest client leaves in year two? Can the agency still make the payments? If the model breaks under a 20% revenue drop, the deal is too aggressive.
Step three: agree the commercial terms. Price, payment period, interest rate, and deferral triggers. Get this in a heads of terms document. It does not need to be legally binding at this stage, but it sets expectations.
Step four: instruct solicitors and accountants. The founder needs their own adviser. The management team needs their own adviser. Do not share one solicitor. The tax and legal interests are different. The total professional fees for a straightforward MBO typically run £15,000 to £30,000, split between both sides.
Step five: complete due diligence. The management team needs to see full management accounts, tax returns, contracts, and employee details. This is not a trust exercise. You are buying a business. Look at everything.
Step six: sign and execute. Share purchase agreement, shareholder agreement, loan note or promissory note, and board resolutions. Then the transition begins.
For more on structuring your agency for a future exit, read our guide on agency growth and exit planning. If you are a marketing agency specifically, our marketing agency accounting page covers the financial metrics buyers look for.
And if you want to talk through whether an unfunded MBO could work for your agency, get in touch. We run the numbers before you commit to anything.
