Management Buy-Out: How to Buy Out Your Boss
If you are the general manager, COO, or de facto leader of a business generating $2 million to $20 million in revenue, you may already be running the show without owning it. You know the team, understand the customers, and grasp the business operations - but without equity ownership. Perhaps it’s time for you to captain the ship.
A management buy-out (MBO) is the path where you move from “key operator” to “owner.” This guide walks through how an MBO actually works: how much you might pay, where the money comes from, and how to structure the deal so it is fundable and fair. We will use an example of a company with $2 million in EBITDA to illustrate how the pieces come together.
Navigate Your Exit with Confidence 🚀
Introducing the Exit Navigator
Whether you're 12 months or 12 weeks from exit, our Exit Navigator gives you a step-by-step roadmap to prepare, position, and sell your tech company at maximum value. Built for founders in the $2M–$20M revenue range, this free download includes:
A deal-readiness checklist
Tips for reducing diligence friction
Red-flag risk items buyers spot quickly
Valuation drivers by business model
A 6-phase roadmap from prep to post-close
Make your exit a strategy—not a scramble.
Book your free assessment call HERE or download our Million Dollar Exit Guide for free below 👇
At a Glance: The MBO in Simple Terms
Who this is for: General Managers, COOs, and senior leaders in stable, established businesses with $2M–$20M in revenue (or around $500K–$5M+ in EBITDA).
Typical valuation range: 3–6x EBITDA. A $2M EBITDA business might be worth roughly $6M–$12M; we use $10M as a working example.
How the purchase is funded: A mix of bank debt, seller financing, equity rollover, and outside investor equity, plus your own capital.
Timeline: Several months from initial conversation to close, often with a structured transition period afterward.
Key risk: Overpaying or over-leveraging a good business into a bad personal outcome.
Is a Management Buy-Out Right for You?
A Management Buy-Out (MBO) is not the right path for every operator or every company. It tends to work best when a few conditions are true:
When an MBO is a good fit
Strong trust with the owner: You have a history of open conversations, and the owner sees you as the natural successor.
Stable, recurring cash flow: The business generates predictable earnings with manageable capital expenditure.
Depth beyond the owner: Day-to-day operations do not collapse if the seller steps back; the team and systems carry the work.
Aligned time horizon: The owner is within a realistic window to exit (1–5 years), not decades away mentally.
Clear story for lenders and investors: The business fits a straightforward “good small business” narrative — steady margins, diversified customers, and no wild swings.
When an MBO is not a good fit
Owner is not emotionally or financially ready: They say they want to exit, but behavior suggests they are not prepared to let go.
Business is over-reliant on the owner: Key customer relationships, technical knowledge, or sales all sit with the current owner you want to buy-out.
Highly cyclical or capital-intensive model: Earnings move sharply with the economy, or the business requires heavy ongoing reinvestment.
Unresolved internal issues: Major people, legal, or compliance problems that will surface during diligence.
If several of the “not a good fit” signs apply, your time might be better spent fixing those issues first, or exploring a different path to ownership.
Schedule a meeting with our Exit Planning Advisory to learn more.
What is a Management Buy-Out?
A management buy-out occurs when existing leadership — often a general manager, COO, or senior executive — purchases the company they help operate. Compared to an external sale, MBOs often:
Offer smoother transitions for staff and customers.
Preserve company culture and operating rhythm.
Give the seller more control over who takes over their legacy.
However, even with strong relationships, financing the buy-out is a serious capital project. You need the right structure, the right partners, and a deal that the company’s cash flow can actually support.
Sample Deal: Valuing a $2 Million EBITDA Business
Before we go further, it is worth defining one key term: EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for the cash-generating power of the business. Most small business deals are priced off a multiple of EBITDA rather than revenue. For a deeper dive on how EBITDA works and how it is calculated, see our guide: What is EBITDA and Why It Matters in a Sale?.
Consider a business with the following traits:
$2 million in EBITDA.
Stable revenue with a loyal customer base.
Moderate growth and a strong internal team.
Valuation typically ranges from 3 to 6 times EBITDA. Assuming a midpoint of 5 times, the business would be valued at $10 million.
The challenge: how do you buy a $10 million company without $10 million in cash?
The answer is to combine several capital sources in a structure that aligns risk and reward among you, the seller, lenders, and any outside investors.
Four Key Components of a Management Buy-Out
Most MBOs blend the following components:
Cash at close
Upfront funds from your personal savings, bank loans, or equity investors. This is what the seller receives on day one.
Seller financing (seller note)
The seller defers part of the purchase price as a loan, paid over time with interest. This reduces the cash needed at close and keeps the seller invested in your success. For more detail, see our guide on seller financing.
Earn-out
Additional payments tied to future performance — for example, hitting specific revenue or EBITDA targets over 2–3 years. For a deeper dive on structures and pitfalls, see How Earnouts Work.
Equity rollover
The seller keeps a minority stake, often 10–30 percent, instead of selling 100 percent. This reduces the upfront price and signals confidence in the future. For more on this tool, see our guide to equity rollovers.
The seller keeps a minority stake, often 10–30 percent, instead of selling 100 percent. This reduces the upfront price and signals confidence in the future.
Example Deal Structure: $2M EBITDA Business
Let’s assume the buyer, a general manager, has $500,000 in personal capital to contribute. To close the deal, they will need to bring in outside funding for the remainder. One option is to partner with a private equity (PE) fund or individual investor for the rest of the equity.
A sample capital stack for a $10M purchase price might look like this:
You do not shoulder the entire $10M price yourself. You design a structure where the business’s cash flow, plus some reasonable growth, can comfortably support the debt and investor expectations.
How does the deal get funded?
Understanding who brings what to the table will make your conversations with sellers, lenders, and investors more productive.
The seller
Provides seller financing and sometimes an equity rollover.
Cares about: total economics (price + interest + earn-out), security of payments, and the legacy of the business.
The bank or lender
Provides the senior debt (term loan or asset-based facility).
Cares about: stable cash flow, collateral coverage, and your track record running the business.
Outside equity investors
Provide additional equity when your own capital is not enough.
Cares about: target return, time horizon to exit, governance rights, and your ability to execute the plan.
Your job as the buyer is to align these parties in a structure that is financeable, fair, and realistic for the business.
Single Investor vs. Multiple Investors
When raising the investor equity portion, there are two common paths:
Working with a single investor (e.g., PE fund or family office)
Simplifies communication and alignment.
Clear governance and decision-making.
Often brings strategic guidance, additional capital, and a playbook.
May require a larger equity stake and stronger control rights (board seats, vetoes).
Working with multiple investors (a small group of individuals)
More flexible sources of capital.
Potentially less control given to any one party.
More complex shareholder agreements and communication.
Harder to align expectations on reinvestment, distributions, and exit timing.
For most first-time buyers in the $8–$15M enterprise value range, partnering with a single experienced investor or PE group is often cleaner and more efficient.
How to Finance Your Equity Share
Even with investor support, you still need to finance your share of the equity. Common approaches include:
Personal capital
Savings, bonuses, or liquidity from previous exits. In the example above, $500,000 covers 5 percent of a $10M deal.
Investor partners
A PE fund, family office, or a small group of high-net-worth individuals who understand small business and private ownership.
Step-up (sweat) equity
You earn a larger stake over time as you hit agreed milestones in revenue, EBITDA, debt pay-down, or leadership transition.
Step-up Equity is a wealth multiplier that Independent Sponsors (form of Private Equity) have taken advantage of for decades.
How Step-Up Equity Works in Practice
If you are light on cash but strong on operational capability, you can negotiate a phased ownership model.
You and the seller (and any investors) agree on:
An initial ownership stake you buy with cash at close.
Clear performance or time-based milestones.
Additional equity you earn as those milestones are met.
What happens if milestones are not met on time.
A simple example:
You should also define downside scenarios:
If the targets are missed by a small margin, do you lose out on all of the corresponding ownership grant? Or do you only lose a part of it?
If performance materially underwhelms, does your investment partner keep a larger stake, or do you pause additional vesting?
Well-designed step-up equity lets you buy into the business at a pace that matches both performance and risk.
A Step-by-Step MBO Process
To make this concrete, here is a simple sequence most successful MBOs follow:
Quietly assess fit
Evaluate the business through an owner’s lens: cash flow quality, customer concentration, team depth, and capital needs.
Rough valuation and deal sketch
Develop a valuation range and a draft capital stack. Pressure-test whether the business can support the debt and investor returns.
Test lender and investor appetite
Have preliminary, confidential conversations with lenders and potential equity partners to see what is realistic.
Approach the owner with a concept, not a demand
Share that you are interested in a path to ownership and outline the broad contours (not final terms) of what that could look like.
Structure and negotiate
Work through price, terms, seller note, earn-out, equity rollover, governance, and your compensation.
Diligence and documentation
Formal due diligence, financing approvals, and legal documentation (purchase agreement, loan docs, shareholder agreement).
Closing and transition
Execute the deal, transition responsibilities, and align on a 6–24 month post-close plan with clear roles.
Biggest MBO Mistakes to Avoid
Some of the most painful outcomes do not come from bad businesses; they come from good businesses bought on bad terms. Common mistakes include:
Overpaying for the business
Agreeing to a valuation at the very top of the range (or above it) without adjusting your debt payment costs, seller note payment terms, or earn-out structure.
Overl-everaging the company
Taking on so much debt that a modest downturn, lost contract, or necessary reinvestment puts you on the edge of bankruptcy.
Vague expectations with the seller
Not documenting the seller’s post-close role, time commitment, and decision-making authority. This leads to confusion, frustration, and stalled transitions.
Aggressive earnout terms
Accepting targets that require heroic growth or perfect conditions to hit, effectively turning your first few years into a high-stress bet.
Skipping independent advice
Relying solely on the seller’s advisors or on internal instincts, instead of getting professional support on valuation, structure, and tax. Start with a free valuation from our team HERE.
A good rule of thumb: if a deal only works under an optimistic scenario, it probably does not work.
How to Start the Conversation with the Owner
Proposing to buy-out your boss is a sensitive moment. You do not need a fully baked legal offer to start the discussion, but you should enter it thoughtfully.
A few ways to frame the first conversation:
Showcase your long-term intent
“I see myself here for the long term and I care a lot about where the business goes next. Would you be open to talking about a path where I own more of it over time?”
Invite a collaborative path
“If you ever decide you are ready to step back, I would love to be someone you consider as a successor. Maybe we could sketch out what that might look like.”
Acknowledge their goals
“You have built something valuable here. I want any transition to feel fair and structured for you, and I am willing to do the work to make it fundable.”
From there, you can bring in your advisor to help convert intent into a real, financeable proposal.
Should You Hire an M&A Advisor?
Even if you trust the seller and understand the business, an advisor can dramatically improve outcomes by helping you:
Confirm valuation ranges based on actual market data.
Structure fair, fundable deals across debt, seller notes, and equity.
Anticipate and manage lender and investor concerns.
Reduce risk for both you and the seller.
Keep the process on track from first conversation through closing.
At Breakwater M&A, we specialize in working with first-time buyers and experienced founders to design win-win MBOs.
If you are considering buying out your boss, it is worth having a confidential conversation before you put a proposal on the table.
Frequently Asked Questions (FAQ)
How much equity should I expect to own as the operator?
There is no single standard, but many first-time MBOs land with operators owning 20–60% of the equity at close, depending on how much cash you invest, how much seller financing is involved, and whether outside investors are part of the deal. Step-up equity can move you closer to majority ownership over time if the business performs.
Can I do an MBO if I have very little personal capital?
Yes, but the structure has to reflect that reality. You will likely lean more on seller financing, earnouts, and possibly an outside investor. Lenders and sellers will look harder at your track record in the business, and you may need to accept a lower initial ownership percentage with the ability to earn more over time.
How long does an MBO usually take from first conversation to close?
Most MBOs take 3–9 months from first serious conversation to closing, depending on lender timelines, quality of financials, and how quickly both sides can align on terms. If the company’s records are clean and the relationship is strong, the process can be on the shorter end of that range.
Do I have to tell the whole team I am buying the business?
Not at first. Early conversations are usually limited to the owner, your advisors, and any financing partners. As the deal firms up, you will agree on a communication plan with the seller so staff, customers, and key partners hear a clear, unified story at the right time.
When should I bring in an advisor?
Ideally before you float a concrete offer. An advisor can help you pressure-test valuation, structure a fundable capital stack, and anticipate lender and investor questions so your first proposal is realistic and credible.
Recommended Reading
If you are exploring a management buy-out, these guides pair well with this article:
Valuation and pricing
Deal structure and negotiation
Business Exit Guide - Part 5 - Negotiation
Working with advisors
📥 Want the Full Guide?
Get access to The Complete Million Dollar Business Exit Guide (includes our Exit Checklist)—downloadable with one click and packed with tools, checklists, and insights.
Enter your email below for full access:
Join an upcoming webinar!
Whether you’re looking to buy or sell an IT services company, join one of our upcoming events:
Come visit us!