Who this is for: Founders who are considering or have been approached about a management buyout and want to understand how the structural decisions made before and during the transaction affect the after-tax outcome.
A management buyout is not primarily a price negotiation. It is a structural design exercise. The price is what the management team can afford to pay, constrained by the debt they can service and the equity they can raise. The structure is what determines how much of that price you actually keep.
Most founders focus entirely on the headline number. The management team's advisers focus on the structure. That asymmetry is the most expensive mistake a selling founder can make in an MBO.
The structural decisions that change the economics
Three structural decisions made before the MBO conversation begins determine the after-tax outcome for the selling founder.
The first is whether a holding company is in place. If you sell shares in a trading company directly, the gain is subject to capital gains tax at 24% (or 10% if BADR applies, up to the £1 million lifetime limit). If a holding company sells shares in the trading subsidiary, Substantial Shareholding Exemption may apply, and the gain is exempt from corporation tax entirely. The holding company must have held at least 10% of the trading company for 12 continuous months. The clock starts from the date the holding company is installed.
The second is how deferred consideration is structured. In most MBOs, part of the consideration is deferred: paid over time as the business hits targets, or structured as a vendor loan note. The tax treatment of deferred consideration depends on how it is documented. Loan notes qualifying under the QCB rules can defer CGT until the notes are redeemed. Earn-out arrangements are taxed differently depending on whether they are structured as capital or income. These decisions are made in the transaction documents. If you are not driving them, the buyer's advisers are.
The third is whether management equity is structured through growth shares or EMI options. If the management team holds ordinary shares alongside you, any uplift in value from the MBO price to the exit price is shared proportionally. Growth shares issued to management at a low threshold value direct future appreciation to them specifically, reducing your dilution and keeping the bulk of the exit proceeds with you.
| Structural decision | Without planning | With planning |
|---|---|---|
| Holdco + SSE | 25% corp tax on gain | 0% on gain (SSE) |
| Deferred consideration | Taxed on receipt, income rates | CGT deferred via QCB loan notes |
| Management equity | Ordinary shares, proportional dilution | Growth shares, threshold-based participation |
The timing problem
All three of these decisions require lead time. The holding company needs 12 months of continuous ownership before SSE applies. The growth shares need to be issued before the MBO conversation begins, at a valuation that reflects the current business value rather than the anticipated exit price. The loan note structure needs to be agreed before heads of terms are signed.
By the time most founders are in an active MBO conversation, the window for the most valuable structural decisions has already closed. The holdco was not installed. The growth shares were not issued. The deferred consideration structure is being dictated by the buyer's advisers.
The architecture conversation is not a transaction conversation. It is a pre-transaction conversation. The founders who come out of MBOs with the best after-tax outcomes are the ones who had the structural conversation two or three years before the MBO was on the table.
The management team's advisers are designing the structure of the transaction. If you are not designing it first, you are accepting theirs. The architecture matters more than the price.
The Architecture for Your Situation
The structures described in this article are not theoretical. They are the architecture that founders at the £500k+ profit level install to govern, protect, and grow their capital. The audit maps your current position in five minutes and shows you exactly which of these structures apply to your situation.
The audit is free. The Capital Architecture is delivered within 48 hours of your intake call. The Discovery Call at £500 is credited in full against it.