Management buyout versus employee ownership: Which business exit strategy fits your goals?
- Michelle Philippon
Every business owner will face the decision of how—and when—to leave their company. Effective exit planning ensures you not only receive market value but also protect your legacy, support your employees, and transition on your terms.
If you’re considering selling your business internally, two common options are management buyouts (MBOs) and employee ownership (EO). Both keep ownership in familiar hands, but they differ in several ways. Let’s explore how.
What is a management buyout?
A management buyout is when a select group of key employees—often your leadership team—purchases the company from you.
Key traits of an MBO
- Buyers are internal managers with deep company knowledge.
- The number of buyers is limited.
- Offers a direct, streamlined sale process.
Pros of an MBO
- The owner trusts the buyers to protect the business.
- Cultural and operational continuity.
- Strong influence over the sale process and timing.
Limitations
- Limited ownership transfer (managers only).
- No proven productivity gains.
- No special tax advantages.
What is employee ownership?
Employee ownership transfers ownership of the business to a broader group of employees—not just management—through an Employee Stock Ownership Plan (ESOP), worker cooperative, or Employee Ownership Trust (EOT).
Key traits of EO
- Ownership is shared across your workforce.
- Can provide significant tax benefits to the seller and company.
- Proven to boost productivity and employee engagement.
Pros of EO
- Rewards and retains your entire team.
- Preserves your mission and values.
- Allows for partial sales, enabling a phased exit.
Limitations
- More complex transaction structure than an MBO.
- May involve more succession planning for when the owner exits.
- Requires employee education and engagement in ownership culture.
MBO versus EO: quick comparison
|
Factor
|
Management buyout
|
Employee ownership
|
|---|---|---|
|
Market value
|
Can get market value for business
|
Can get market value for business
|
|
Process control
|
Owner can have influence on timeline and terms
|
Owner can have influence on timeline and terms
|
|
Preserve legacy
|
Yes, via trusted leadership team
|
Yes, through shared employee ownership
|
|
Tax benefits
|
None specific to MBO
|
Potential tax advantages for seller, employees, and company
|
|
Employee attraction and retention
|
Retains key managers—and possibly workforce
|
Retains and engages entire workforce
|
|
Performance
|
No proven productivity boost
|
Linked to higher productivity
|
|
Employee involvement
|
Limited to managers
|
Broad employee participation
|
|
Risk
|
Mostly carried by management team
|
Risk is shared among company, selling owner, and employees
|
Factor-by-factor analysis: MBO versus EO
There are several key considerations to keep in mind when looking at both exit planning options.
1. Market value
In an MBO, price may be limited by the company’s ability to finance the purchase internally and the management team’s access to external financing. Still, depending on the type of financing key leaders use to purchase the company, business owners can get market value for their business with an MBO.
EO structures, meanwhile, are designed to meet market value, often making them competitive with outside buyers. There’s also an increased availability of funds directed to EO transitions such as our Employee Ownership Catalyst Fund.
2. Process control
MBOs offer a straightforward process with fewer stakeholders. EO transitions generally allow flexibility and process control—including gradual ownership transfer—but require more coordination with an EO transition team.
3. Preserve legacy
Both MBO and EO can protect your company’s mission and culture, but EO usually ensures these values get embedded across the entire team and endure beyond leadership changes.
4. Tax benefits
Depending on the type of EO, EO transactions can unlock significant tax savings, benefiting both the seller, the employees, and the company. MBOs lack these specific tax advantages.
5. Employee attraction and retention
EO creates widespread ownership, increasing employee engagement and retention. EO companies often create a desirable workplace where employee-owners have a say in their day to day, participate in profits, get rewarded for bringing ideas forward, and have the opportunity to grow and advance in their careers.
MBOs retain key leaders but may not impact the broader workforce in the same way; everything depends on what the management buyers decide, then and the future. Also, MBOs don’t usually create unique ownership cultures that EO companies are known for, so they may lack this attractiveness to jobseekers.
6. Performance
Research shows EO companies often outperform peers in productivity and profitability. MBO performance depends on the management team but hasn’t been proven to boost metrics.
7. Employee involvement
EO gives all employees a direct stake in the company’s success. MBO ownership is concentrated in a small group of managers.
8. Risk
In a management buyout, the management team bears the majority of the risk—particularly financial and operational risks—while the seller retains some risk if seller financing is involved.
In employee ownership transitions, risk is shared among the company, selling owners, and employees, but the allocation depends on the ownership structure and financing.
Conclusion: choosing the best exit path
The right choice between MBO and EO depends on various factors. It also depends on your leadership team. Do you have key leaders who want to buy the business from you—and are able to?
Both paths keep your business in trusted hands. The best way to decide is to explore your options with expert guidance.
Schedule a free consultation with Project Equity today to discover the next step toward a successful and meaningful exit.
