By Bruce McGechan, CVA — Fealty Business Valuations
A management buyout (MBO) is the existing management team buying the company, or a controlling stake in it, from the current owner. The team usually puts in some equity, the vendor leaves money in via a note, and a bank funds the rest.
It’s a practical succession path that’s underused in NZ. About 50% of NZ SME owners are now over 55 (Stats NZ Business Demography Statistics, 2025), and a lot of them have capable management teams sitting right there.
This article is about the process — the stages, the people, the funding mix, and where independent valuation fits in. It’s not a guide to how the valuation is done. For that, see the article: How does a Shareholder Buyout Valuation Work in NZ?, nor is it about the price-setting see article Partner Buyout Valuation NZ: How the Price Is Actually Set.
This page is for information only. It isn’t legal, tax, or financial advice. Talk to your lawyer, accountant, and a qualified valuer for your specific situation.
MBOs work when 4 things line up:
MBOs don’t work when margins are thin, there isn’t a team the GM can draw on, or the owner expects a strategic-buyer premium.
The owner and the management team have an honest conversation. Is this even possible? What’s the ballpark price? Can the team raise the equity? Will a bank lend against this business?
This stage is mostly about killing the deal early if it’s not real. A 30-minute conversation with a valuer and a banker saves 6 months of false hope.
The price is set by an independent valuer. Not the vendor’s accountant. Not the team’s accountant. One valuer, working under professional standards, producing a report both sides can defend.
This is where a fixed-price independent valuation earns its keep. The vendor knows the number isn’t being talked down by the buyers. The team knows it isn’t being talked up by the seller. The bank knows the number wasn’t set by either party.
For the how of that valuation: standard of value, level of value, methods, discounts; see How Does a Shareholder Buyout Valuation Work in New Zealand?
Most NZ MBOs use a 3-part stack. Indicative ranges:
These are ballpark. Every deal is different — earn-outs, deferred consideration, share repurchases under Companies Act 1993 ss.60-61, and personal guarantees all shift the numbers.
The valuation feeds directly into this stage. The bank will only lend against a defensible number. The owner will only carry a note if the headline price is one they can live with.
The lawyers do their work. A share sale agreement. A new shareholders’ agreement for the post-completion company. Security documents for the bank. Personal guarantees. A solvency test under the Companies Act 1993, especially if the company is buying back the owner’s shares rather than the team buying them direct.
If the company is providing financial assistance for the purchase of its own shares, sections 76 to 81 of the Companies Act 1993 set out the process. Your lawyer will walk through this. Skip it and the deal is voidable.
Money moves. Shares transfer. The owner’s directorship ends, or shifts to a non-executive role with a defined exit date.
The transition is its own workstream. Customers and key suppliers need to hear it from the right person, in the right order. Staff need to know who’s running the place on Monday. The owner’s institutional knowledge needs to land somewhere before they leave.
This stage gets short-changed more often than the others. The deal closes, everyone exhales, and 6 months later the new owners realise they don’t know which supplier gives them 60-day terms because the previous owner never wrote it down.
The cast:
The valuer is independent of everyone. That’s the point. If the valuation comes from the vendor’s existing accountant, the team won’t trust it. If it comes from the team’s accountant, the vendor won’t. Independence is what makes the number work.
A worked sketch (illustrative, not a quote):
A $5M business, valued on a controlling basis. Funding mix:
Or described another ways for a business with $1M EBITDA:
The bank wants to see free cash flow comfortably covering interest (e.g. debt coverage ratio = Interest / EBITDA) and principal on its debt, with the vendor note sitting behind. The vendor wants security ranking that gives them recourse if it goes wrong. The managers want a clear path to refinancing the vendor note out at year 5 — usually by paying down bank debt fast enough to free up borrowing capacity.
Personal guarantees are almost always involved. Likewise a GSA over the company assets.
These ratios are indicative. The actual stack depends on the bank’s appetite, the business’s cash flow profile, and how much the vendor wants to walk away with on day one.
The valuation does two jobs in an MBO:
Without an independent valuation, lenders get cautious and the team and the vendor end up arguing about price right up to completion. Goodwill erodes. Deals fall over at the last minute.
The valuation is also where most of the technical work sits. Standard of value, level of value, discounts, the equity bridge all decide the equity value. See How Does a Shareholder Buyout Valuation Work in New Zealand?
Skipping financial assistance steps. Companies Act 1993 ss.76-81 set out what’s required when the company helps fund the purchase of its own shares. The solvency test in s.108 also applies to many MBO structures. Skip these and the deal is voidable.
Over-leveraging the company. The most common cause of MBO failure isn’t strategy. It’s debt service. If forecast cash flow only just covers debt repayments, one bad quarter sinks it.
No new shareholders’ agreement. The old agreement was written for the old ownership. The new company needs its own document including buy/sell provisions, decision rights, dividend policy, exit mechanics. Drafting it after a dispute is too late.
The owner staying on too long without a defined exit. An owver who stays “to help” for 18 months without a written role and a written end date undermines the team. Define it. Pay them for it. End it.
Treating the valuation as a formality. A formula that worked in the old shareholders’ agreement isn’t a substitute for a fresh independent valuation. Markets move. Multiples move. The formula doesn’t.
Realistic for an NZ SME: 4 to 9 months from first serious conversation to completion.
Deals that close in under 4 months usually had the funding pre-arranged. Deals that take more than 9 months usually had something unresolved at Stage 1 (price expectations, team commitment, owner ambivalence) that should have killed the deal earlier.
How long does an MBO take in NZ? 4 to 9 months is realistic from first serious conversation to completion. Deals close faster when the funding is pre-arranged and the vendor is committed to a clean exit.
Who pays for the valuation in an MBO? Usually the company, sometimes split between vendor and buyers. The point is that the valuer is paid to be independent — not to favour whoever cuts the cheque. A fixed price helps remove that suspicion.
Can an MBO be funded entirely by the bank? Almost never. Banks want vendor finance or management equity behind their debt. A 100% bank-funded MBO usually means the price is too low, the bank is taking too much risk, or both.
What happens to existing employee contracts? Most transfer with the business under the Employment Relations Act 2000 (Part 6A applies in some industries). The new owners inherit the obligations. Variations need to be negotiated.
Do we need a new shareholders’ agreement? Yes. The old one was written for the old ownership. The post-completion company needs its own document including buy/sell, decision rights, dividend policy, and exit mechanics. Don’t wait until a dispute.
Fealty offers fixed-price independent valuations for shareholder buyouts and management buyouts. You know the cost before you start.
For most MBOs, that’s the Independent Valuation ($3,900 + GST) — a full written report your bank, your vendor, and your management team can all defend.
See pricing and what’s included →
For the underlying valuation theory — standard of value, level of value, methods, discounts — see the pillar: How does a shareholder buyout valuation work?
Related reading: Partner Buyout Valuation NZ: How the Price Is Actually Set