Kishen Patel
Founder, Consult EFC | ICAEW Chartered Accountant
Kishen helps founders translate operational success into a defensible Business Valuation. He specialises in “Investor-Ready” financial modelling to ensure owners don’t just know their number, but actually keep more of it upon exit.
Table of Contents
A Management Buyout can feel like buying a house from a family member. Everyone knows each other, everyone has opinions, and nobody wants to “win” if it breaks the relationship.
That’s why pricing an MBO is often harder than a normal sale. The seller is still the boss, until they aren’t. The buyers are still employees, until they’re owners. Emotions sit right next to spreadsheets, and you still need to work together through the handover.
A fair price in an MBO isn’t the highest number someone can justify. It’s a deal that’s defendable (it stands up to scrutiny), financeable (banks and investors will support it), and workable (the business can thrive after completion). This article gives you a simple framework to reach a sensible price range, without falling into the traps that stall or sink SME buyouts in the UK.
Is Your MBO Price “Fair”?
- Defendable: Can the valuation withstand a third-party audit?
- Financeable: Will a UK lender support the debt-to-EBITDA ratio?
- Workable: Does the business have headroom to invest after repayments?
- Balanced: Does it account for the “Inside Discount” vs. Market Premium?
Free Valuation Strategy Audit
Is your Management Buyout pricing defensible against a bank’s scrutiny? Spend 30 minutes with Kish Patel (ICAEW) to stress-test your numbers before you commit to a deal structure.
We’ll review your add-backs to ensure your valuation reflects true, recurring market potential.
Identify the specific risk-adjustments needed to align your price with current 2026 UK SME trends.
● Currently accepting 2 audits per week.
What a “fair price” really means in a Management Buyout
“Fair” means different things depending on where you sit.
For the seller, fairness often means recognition for years of risk, long hours, and value built over time. For the management team, fairness means a price the business can carry without stripping out investment, wages, or breathing room.
It also helps to separate headline price from deal value. Two offers can share the same headline number, but land very differently once you factor in timing and risk.
One reason MBO negotiations get tense is that people talk past each other. The seller talks about “price”. The buyers talk about “affordability”. Both are valid, but they’re not the same thing.
Before you argue about numbers, agree the basics:
- Are you valuing the whole business, or just the shares being bought?
- Is the deal cash at completion, or staged over time?
- What happens if results dip after the seller steps back?
In valuation terms, you’ll hear two phrases:
- Enterprise value (EV): the value of the trading business before debt and cash.
- Equity value: what’s left for shareholders after you subtract debt and add cash.
So, even if you agree a strong enterprise value, the seller’s cheque depends on the debt and cash position at completion.
To make that difference clear, here’s a simple bridge.
The practical takeaway is simple: a fair MBO price is a package, not a single figure.
Seller view: certainty, clean exit, and not leaving money on the table
Most sellers want three things: confidence the valuation is market-based, low risk of later reductions, and a clean enough exit that they can move on.
In an MBO, sellers also worry about an “inside discount”. A trade buyer might pay more because they can cut costs, cross-sell, or merge operations. Management buyers usually can’t. That doesn’t mean an MBO should be cheap, but it does mean the value must tie back to the business’s own cash generation.
Forecasts are another flashpoint. The management team often owns the budget, while the seller worries it’s been shaped to support a lower price. Trust matters, but so does evidence. A seller can respect the team and still ask for a forecast that ties back to the order book, pipeline, and capacity.
A seller doesn’t need the highest valuation story. They need the most believable one, with terms that protect them if performance slips.
Management buyer view: a price that banks will fund and the business can repay
Management teams usually feel the weight of two risks at once. They’re taking on debt, and they’re taking responsibility for results. A high price looks fine on paper, until the first slow quarter arrives.
In February 2026, funding is still shaped by cash flow reality. Interest costs have changed what “affordable” means. Lenders also price risk more sharply, which feeds into valuation outcomes. Recent market commentary has highlighted a widening split: premium prices for high-quality businesses, and tougher outcomes for weaker ones.
So what do banks and investors focus on?
They look for stable EBITDA, strong cash conversion, manageable working capital swings, and low customer concentration. They also test whether profits can cover debt repayments with headroom. If the numbers don’t support the structure, the deal stalls, even if both sides “agree” the valuation.
Overpricing doesn’t just hurt the buyers. It can stop the seller exiting at all.
Build a defendable valuation using three checks, not one big number
A single valuation method is like checking the weather by looking at one cloud. You might be right, but you’re taking a chance.
A better approach is to use two to three methods, then pull them into a tight range. Each method answers a different question:
- What is the business worth based on the cash it can produce?
- What are buyers paying for similar companies?
- What’s the floor value if you strip it back to assets?
For an SME Management Buyout, this gives you something both sides can defend. It also reduces the “my number versus your number” problem.
Independence helps here. When one party builds the model, bias creeps in, even with good intent. An independent valuation can reset the tone, because it gives you a shared base to discuss.
Just as important, write down assumptions early. Agree what “normal” looks like for margins, owner costs, and working capital. If you don’t, you’ll argue about it later, when emotions are higher and deadlines loom.
DCF in plain English: value the cash the business can actually produce
A discounted cash flow (DCF) is simple in concept: estimate the cash the business can generate in future, then translate that into today’s value.
The key word is cash. Profit is an opinion, cash is a fact.
To build a sensible DCF for an SME:
- Start with a realistic trading forecast.
- Subtract tax, ongoing investment (capex), and changes in working capital.
- Allow for debt costs if you’re modelling equity returns.
- Discount future cash because cash today is worth more than cash later.
Where DCF models go wrong in smaller businesses is predictable. Growth gets overstated. Working capital gets ignored. Capex gets treated as “one-off”. Then the discount rate is set too low, which inflates the value.
A small change can shift value fast. For example, if your forecast assumes 10 percent growth but reality is 5 percent, the gap compounds each year. If you also miss that growth needs more stock and debtor funding, cash drops again. The value moves twice, and not in your favour.
Most DCFs also use a “terminal value”, which captures value beyond the forecast period. Keep it grounded. If you assume steady long-term growth, it must fit the market. If you use an exit multiple, sanity-check it against your market multiple work.
Market multiples: use EV/EBITDA carefully, then adjust for your reality
EV/EBITDA multiples are common because they’re quick, and they help compare businesses of different sizes. They can also mislead when used without context.
A multiple isn’t a badge of honour. It’s a shorthand for risk and quality.
| Business Quality | Typical Multiple Range | Core Driver |
|---|---|---|
| Premium Asset | 7.0x – 10.0x+ | Contracted recurring revenue, management team independent of owner. |
| Standard SME | 4.0x – 6.0x | Stable margins, healthy pipeline, some owner-dependency. |
| High Risk | 2.5x – 3.5x | Customer concentration (>30%), lumpy revenue, owner-led sales. |
Higher multiples tend to go to businesses with recurring revenue, stable margins, strong customer spread, and a management team that can run without the owner. Lower multiples show up when revenue is lumpy, margins swing, or one customer dominates.
You’ll also hear big headline numbers in the press. For example, market reporting has shown buyout firms paying high median EBITDA multiples in 2025 (11.8 times). That reflects premium assets, not the typical UK owner-managed SME. Treat it as a signal about the top of the market, not a promise.
Be wary of “my mate sold for 10x” comparisons. Ask instead: was that business larger, more recurring, or less dependent on the owner? Did it have a different funding mix?
Use a range, and only compare against genuinely similar companies. If you can’t find strong comparables, use multiples as a sense-check, not the main anchor.
Asset and break-up checks: when hard assets matter more than profits
Asset-based valuation matters when assets drive value.
That can be true for property-heavy firms, equipment-heavy operations, and distressed businesses where profits don’t reflect potential. In those cases, asset value can set a floor. It can also act as lender comfort, because assets can support security.
For a healthy service business, asset value usually tells you less. The value sits in people, processes, customer relationships, and reputation. Still, an asset check can stop you paying over the odds when profits are temporarily high, or when working capital hides problems.
If the business has distinct divisions, a sum-of-the-parts view can help. One unit might deserve a higher multiple, while another drags it down. Seeing them separately often improves the fairness of the final range.
Turn valuation into a workable deal structure that feels fair on both sides
Critical MBO Stress-Test
“Does the deal break in the rain?”
If a 10% dip in revenue or a 1% rise in interest rates makes the debt repayments impossible, the valuation is too high. A fair price includes breathing room for the management team to navigate the first 12 months post-exit.
Two deals can share the same valuation, yet feel miles apart.
A seller might agree a price, then realise most of it arrives “if and when”. A management team might accept a number, then see the repayment profile and panic. So structure matters as much as valuation.
The building blocks that change risk and value include:
- cash at completion
- deferred consideration
- earn-outs
- vendor loan notes
- working capital and net debt adjustments
Rather than treating these as legal mechanics, treat them as risk-sharing tools. The goal is to match payments to the business’s ability to fund them, while keeping the seller’s downside fair.
Earn-outs, deferred payments, and vendor loans, how they change the real price
Earn-outs can work well when both sides believe in growth, but disagree on timing or certainty. They let the seller share in upside, while reducing the upfront funding burden.
However, earn-outs fail when targets are vague or when control is unclear. If the seller exits fully, but the earn-out depends on decisions the buyers control, arguments often follow. Keep measures simple, set clear accounting rules, and define what happens if exceptional items hit.
Deferred payments help cash flow because they spread the purchase price over time. They also increase seller risk, because the seller becomes a creditor.
Vendor loans (loan notes) bridge a funding gap when banks won’t stretch, but both parties still want the deal. Agree the term, interest rate, and security upfront. Keep the schedule realistic, because a vendor loan that strains cash can hurt everyone.
A simple rule helps: the more risk the seller carries, the more the seller should be paid for it, either through price, interest, or stronger protections.
Working capital and debt, the common place where deals fall apart
Working capital is where good faith deals go sour.
In an MBO, cash is often tighter because debt funding is part of the structure. In a higher interest cost environment, cash becomes even more valuable. That’s why both sides must agree what “normal” working capital looks like at completion.
Also agree whether the deal is cash-free, debt-free. In plain terms, that means the seller delivers the business with a normal level of working capital, but without keeping surplus cash or leaving borrowings behind (unless agreed).
Here’s a short list of items that are worth agreeing early, because they trigger late-stage renegotiation:
| Item to agree | Why it matters |
|---|---|
| Target working capital | Prevents the seller stripping cash, or the buyer overfunding |
| Net debt definition | Stops surprises around overdrafts, loans, and intercompany balances |
| Tax liabilities | Clarifies what belongs to pre-completion trading |
| Leases and hire purchase | Avoids hidden “debt-like” obligations |
| One-off items | Stops normalisation debates after the number is set |
Get these agreed before you “shake hands” on valuation. Otherwise, you’re negotiating twice, and trust takes the hit.
A step-by-step process to agree a price range and keep trust intact
A good Management Buyout process is closer to a well-run project than a hard sell.
It also works best when both sides commit to a shared timetable and a shared evidence base. That doesn’t remove negotiation, but it keeps it fair.
Here’s a practical sequence that works well in SMEs:
- Align on aims: seller exit goals, buyer ambitions, and non-negotiables.
- Agree the valuation approach: two to three methods, and what “normalised EBITDA” means.
- Build one set of numbers: a shared model with written assumptions.
- Set a value range: not a single number, and not a wish.
- Design structure: match payments to cash flow, and share risk clearly.
- Stress-test: check downside cases and adjust terms before signing heads.
- Document early: a short set of agreed definitions reduces later conflict.
This keeps the focus where it should be, on a price the business can live with.
Get the business “valuation-ready” before you negotiate
Preparation often creates value, because it reduces perceived risk.
If you want better pricing and better funding options, start early. A 12 to 24-month run-up can make a clear difference to outcomes, especially when lenders ask for proof, not promises.
Focus on the areas that most often move valuation:
- Clean monthly management accounts and a clear story behind the numbers
- A reliable EBITDA bridge (what’s recurring, what’s one-off, what’s owner-related)
- Normalised owner costs (salary, benefits, vehicles, rent, and related party items)
- Evidence behind pipeline and conversion, not just a forecast
- Plans to reduce customer concentration
- Retention of key staff, with clear roles and incentives
When both parties see the same “version of truth”, negotiations become faster and calmer.
Stress-test the numbers so neither side gets surprised after completion
Stress-testing sounds technical, but it’s just asking: what if things don’t go to plan?
Try a few simple downside cases:
- Sales drop 10 percent for six months
- Costs rise 5 percent and you can’t pass it on quickly
- A top customer leaves, or delays orders
- Interest costs stay higher for longer
Then look at the impact on cash and debt cover. If the deal breaks under mild pressure, it isn’t fair to either side.
Use the outputs to shape the deal. You might lower the upfront price, add an earn-out, extend deferred payments, or inject more equity. The right answer depends on the business, but the process is the same.
A fair MBO doesn’t assume perfect trading. It plans for bumps, and agrees who carries which risk.
Red flags that signal the price is unfair or the valuation is weak
Most broken MBOs don’t fail because people can’t agree. They fail because the valuation can’t survive scrutiny, or because the funding doesn’t work.
Spotting the warning signs early saves months of stress.
Numbers that do not tie out, and “adjusted EBITDA” that keeps growing
Adjusted EBITDA has its place. It can remove genuine one-offs and owner-specific costs. It becomes a problem when adjustments grow each time someone challenges them.
Common issues include add-backs with weak support, missing payroll costs for roles the owner covered, and “one-off” expenses that appear every year. Another big one is ignoring working capital and capex, which makes profits look better than cash.
Set clear rules early:
- what counts as recurring
- what evidence is needed for add-backs
- who signs off the adjustments
Then keep one shared schedule, so the same item doesn’t get argued about twice.
When the funding plan quietly sets the price, not the valuation
Sometimes the valuation looks fair, but the bank says no. That usually means the structure is too heavy for the cash flow.
Lenders limit leverage and test interest cover. In practical terms, they cap what the business can repay. If you push beyond that, the deal becomes fragile. It also increases the chance of future underinvestment.
If funding limits cap the price, you still have options. You can inject more buyer equity, use vendor finance, stage payments, or build a more credible growth plan and return later. What you shouldn’t do is force a price that the business can’t carry. That helps nobody.
How Consult EFC can help
A fair Management Buyout price comes from discipline, not bravado. Use multiple valuation checks, write down the assumptions, and shape the structure so risk sits where it can be managed. Keep your eyes on deal value, not just the headline number, because timing and certainty matter.
Most importantly, aim for a business that thrives after completion, because that’s where reputations and returns are made. If you want support with valuation work and practical deal structuring for an SME buyout, speak with Consult EFC to build a defendable range and a funding-friendly plan (this is general guidance, not legal advice).
Free Valuation Strategy Audit
Is your Management Buyout pricing defensible against a bank’s scrutiny? Spend 30 minutes with Kish Patel (ICAEW) to stress-test your numbers before you commit to a deal structure.
We’ll review your add-backs to ensure your valuation reflects true, recurring market potential.
Identify the specific risk-adjustments needed to align your price with current 2026 UK SME trends.
● Currently accepting 2 audits per week.
