Management buyout funding in 2026: the structures that work

Activity has recovered from the trough, though unevenly. KPMG reported that the volume of UK private equity buyouts in 2025 reached its highest level since 2021, at 298 reported deals, even as overall UK PE deal volumes fell 10.2 per cent in the year and mid-market volumes held fairly stable. Buyers are transacting; what has changed is how they pay for what they buy.

The longer view is sobering. The Centre for Management Buyout Research (CMBOR) at Nottingham University Business School recorded 189 UK buyouts worth €41.5bn in 2022, then 160 worth €16.1bn in 2023. In the first half of 2024 alone it counted 95 UK buyouts valued at €16.1bn, matching the whole of the previous year. Value fell by well over half and then began to recover within eighteen months.

Across Europe the pattern is similar. CMBOR puts buyout value at €42.0bn in the first half of 2023, €30.2bn in the second half and €49.6bn in the first half of 2024, across 327 deals. The pipeline is there, and the UK remains the largest and most active market. Competition for the best assets is therefore real, and management teams are bidding against sponsors who have debt available and patient capital behind them.

For a CEO leading a buyout, the implication is that a single-source funding plan is rarely competitive. Lenders, sponsors and sellers each hold a different slice of the risk, and the winning bid combines them. What to do: before approaching the owner, map which slices of the price could be funded by senior debt, private credit, vendor finance, management's own capital and minority equity, and test each with an indicative term sheet.

There is also a structural reason to expect management-led deals to stay prominent. KPMG found that secondary buyouts made up 36 per cent of UK mid-market exits in 2025, so sponsors are still selling mostly to each other rather than to trade buyers or the public markets. A founder weighing a sale compares a management offer with the alternatives: a trade sale, a sponsor-to-sponsor deal or continued ownership. Management's advantage is knowledge and speed; its weakness is the ability to pay. The funding stack is how that weakness is repaired.

The Bank of England's own history is the cleanest way to see the problem. Bank Rate was 0.5 per cent in February 2022, 3.5 per cent by December 2022 and reached 5.25 per cent on 3 August 2023. It stood at 5 per cent after the first cut on 1 August 2024, was reduced to 4 per cent on 7 August 2025 and to 3.75 per cent on 18 December 2025.

That is a substantial easing from the peak, but 3.75 per cent is still more than seven times the rate that prevailed when many sellers formed their view of what their business is worth. Valuation expectations anchored in the 2021 market meet debt service costs anchored in today's. The gap between those two reference points is precisely where contested valuations come from.

Leveraged lending has responded to the easing. AlixPartners found that leveraged deal activity in the UK and European mid-market jumped 48 per cent to 779 deals in 2024, up from 526 in 2023, and that refinancing activity increased by 53 per cent. More deals are being financed, but largely by lenders who price each one individually and who will not stretch leverage simply because rates have come down.

It is worth being clear about what the rate data do not show. Bank Rate is a policy rate, and the cost of a mid-market loan also depends on the lender's margin, the borrower's credit quality and the structure. Private credit margins sit above bank margins to compensate for speed and flexibility. Management should ask every lender to quote the all-in cost on a flat-rate assumption, and treat any pricing that relies on a falling rate path as optimistic until the rate is actually lower.

The implication for management is to build the model on the rate that applies today and to treat any future cut as headroom, not as a funding source. Lenders will stress-test cash flows regardless of the direction of travel. What to do: show lenders a base case at current rates, a downside case with weaker trading, and a clear cash sweep, and ask each lender to confirm leverage and covenant terms against all three.

Two further points matter in practice. First, lenders price off the forward curve but test covenants against the current cost of debt, so a buyout that looks comfortable on a forecast can look tight at the first reporting date. Second, hedging policy is part of the structure. Fixing or capping part of the floating-rate exposure removes one variable from the downside case, at a cost that should be weighed against the covenant headroom it creates. Boards should ask the finance director to set the hedging policy before term sheets are signed, not after funds are drawn.

Alternative Credit Investor reported that European private credit deals totalled a record 987 in 2025, up 15.4 per cent year-on-year and ahead of the previous high of 855 in 2024. The second half of 2025 saw 551 transactions, 26.4 per cent more than the 436 recorded in the first half, and the fourth quarter, with 290 deals, was the busiest on record.

M&A-related transactions were the biggest category, at 33.5 per cent of completed deals in the second half of 2025. In the UK, private credit deals rose from 119 in the first half to 136 in the second half. Trowers & Hamlins made the same observation from the legal side: financing became increasingly available to institutional investors with good track records, particularly from a growing roster of private credit funds.

Herbert Smith Freehills Kramer notes that it is common to see more than 10 private credit providers in the initial stages of a financing. That breadth is useful to a buyout team, because it creates competitive tension, but it also creates noise. Each provider has different appetite for sector, leverage, covenants and the role of the sponsor, and a management team without a sponsor can lose weeks to lenders who will never lend.

A practical test of any offer is the what-if conversation. Ask each lender what happens if trading runs behind plan for two consecutive quarters: whether it will waive, reset or accelerate, who decides, and how fast. Lenders that answer clearly and in writing are signalling how they will behave under stress. Lenders that deflect are signalling the opposite. This is also the moment to ask how information is shared, because a lender that sees the full picture early is more likely to support a sensible amendment later.

The implication is that the funding process needs a lead adviser and a shortlist. Private credit is faster and more flexible than a clearing bank, and also more expensive and more demanding on reporting. What to do: shortlist no more than four or five lenders against explicit criteria, ask each for a term sheet on the same assumptions, and compare total cost, including fees, margin ratchets, prepayment terms and warrants, not just the headline margin.

Private credit also changes who the counterparty is. A direct lender typically holds the loan to maturity and negotiates face to face, which can make amendments easier to agree when trading disappoints and makes the relationship harder to ignore. Management should ask about the lender's record in similar situations, the decision-making authority of the people in the room and how the fund treats waivers. Those answers are often worth more than a small difference in margin, and they are rarely visible in a term sheet.

Harper James, a UK law firm, notes that on a management buy-in or buyout as much as 50 per cent of the purchase price may be deferred and paid out gradually over three to four years. It adds that vendor notes typically become repayable after three to five years, and that vendor financing takes two main forms, debt and equity.

Deferral works because it shifts risk to the person best able to assess it. Trowers & Hamlins found that earn-outs, other deferred consideration mechanisms and warranty and indemnity insurance have all proved popular ways for buyers to mitigate the risk of overpaying, particularly for growth businesses. For a management team buying the company it runs, the seller is also the counterparty that knows the least about future trading and the most about the past, so a link between price and performance is reasonable.

For the owner, the trade-off is credit risk against price. A vendor note is usually subordinated to senior and private credit lenders, so the owner is lending behind the bank. That is acceptable only if the business generates enough cash to service it and the owner has a say in the covenants that could block repayment. Owners are entitled to ask for security, information rights and a clear default position in return.

The implication for the CEO is to open the conversation with a structure, not a number. Say how much would be paid at completion, how much deferred, over what term, at what interest, and what protects the seller. What to do: model the deferred element as a loan with its own cash flows, agree the intercreditor position with senior lenders in advance, and make sure management's equity case still works if payment is delayed.

Documents matter as much as headline terms. A vendor loan note should specify ranking, interest, payment dates, whether payment can be deferred if senior covenants are at risk, and what happens on a sale of the business. An earn-out should define the profit measure in detail, because disputes over accounting policy are a common source of friction after completion. Management should avoid structures that give the seller influence over the operating decisions that determine whether the earn-out is paid. Clean drafting protects the relationship, which is often the real asset both parties depend on.

When senior debt, private credit and vendor finance together fall short, the remaining gap is usually filled with equity. For management teams who cannot write the cheque themselves, a minority investor is the practical answer. The mid-market is where such deals sit: CMBOR found that mid-market European buyouts, valued at €50m to €500m, accounted for 25 per cent of volume and 31.7 per cent of value in 2023.

Private equity's presence in UK dealmaking has also grown. Trowers & Hamlins counted private equity on 514 UK transactions of all sizes in 2024, against 296 the year before. Many of those sponsors hold unspent capital and assets they want to sell, which makes them willing to back credible management teams, provided the economics are shared fairly.

Minority equity carries a price that is easy to underestimate. Investors will ask for preference shares or structured returns, board seats, consent rights and defined exit routes. Management's sweet equity is diluted, and a poorly drafted leaver clause can strip value from a departing executive. The seller may also roll over part of their stake, which aligns incentives but increases the number of parties at the table.

Rollover by the seller deserves separate attention. If the owner keeps a minority stake, the buyout team gains a motivated partner who knows the business, and the funding requirement falls. The cost is a longer shareholder agreement and a need to agree how and when the owner exits. Tag-along, drag-along and pre-emption rights should be settled at the outset, because an owner who is still a shareholder has a continuing say in the business that management is trying to run.

We would not claim that any single structure is correct, because it depends on cash generation, sector and the owner's own plans. The implication is that equity needs negotiating early and in parallel with debt, not after it. What to do: agree the equity story, the governance rights you are prepared to give, and the exit horizon before you approach investors, so the first conversation is about fit rather than terms.

Management should also consider the investor's perspective. A minority investor in a management-led deal is backing people rather than controlling an asset, so it will examine the team more closely than a majority buyer would. Expect questions on succession, on depth below the top team and on the incentive plan. Teams that arrive with an agreed governance proposal, a credible chair candidate and a clear account of how the business would run if a key executive left tend to move faster through investment committees.

Management teams often agree a headline price with the owner and then discover that no combination of lenders and investors can fund it. At that point the options are to cut the price, add vendor finance under pressure or walk away. All three are worse than having tested the stack before the conversation. Funding certainty is also a negotiating asset: an owner will often prefer a lower price with a credible funding plan to a higher one that may not close.

The practical sequence is short. First, establish a defensible view of value and of the cash the business can safely service. Second, size each layer of the stack against that cash flow. Third, take indicative terms from lenders and investors in parallel. Fourth, put a structure to the owner, with deferral and security explained. Finally, run confirmatory diligence with funders aligned, so that conditions do not surface late.

Parallel working also protects confidentiality, because a small, disciplined group of funders is easier to manage than an open auction among lenders. Teams that start with a clear information memorandum, a vendor-agreed management presentation and a cash flow model that lenders can interrogate tend to produce faster, firmer commitments. Poorly prepared models cost credibility and, in this market, lenders do not return to a buyout they have already marked down.

For the CEO the implication is that the buyout is a project with a critical path, not a negotiation with one counterparty. What to do: appoint an adviser to run the funding process, assign management to own the model and the data room, and keep the owner informed so that they see the stack forming as it develops.

A good adviser also protects the team from the conflicts inherent in buying a business you run. Executives know more about the company than anyone, and the owner or other bidders may question whether that advantage is being used fairly. A transparent process, with the owner's agreement on how information is shared, reduces the chance of challenge later. Independent advice for the board, and where appropriate a separate adviser for the owner, are sensible safeguards that also help lenders rely on the information they are given.

A buyout leaves management with a leveraged balance sheet and, often, personal commitments. Debt is serviced from the same cash flows that the team must also use to run and grow the business. Because the cost of borrowing is still elevated, the margin for error is narrower than it was in 2021, and the covenant tests that matter most are those on cash cover and leverage.

The right discipline is to run the model through a handful of realistic shocks: a drop in revenue, a loss of a major customer, a delay in a vendor-note repayment, and a rate environment that stays where it is. Lenders will look at those cases anyway. What management needs is to know in advance how much headroom exists, which covenants bind first, and what the team would do if they did.

Refinancing risk belongs on the list. AlixPartners found refinancing activity rose 53 per cent in 2024, a sign that many leveraged companies are renegotiating terms rather than repaying. A buyout structure that depends on refinancing within three years is exposed to whatever the credit market looks like then. Aligning vendor-note maturities with senior and private credit maturities reduces the risk of one instrument forcing another.

The implication is that governance should be established at completion, not after trouble. Agree a reporting cadence with lenders, a board that includes an independent voice and a clear authority for the finance director. What to do: stress-test the structure, set early-warning indicators, and write the response plan before it is needed. These choices rarely make headlines, but they separate a buyout that survives a bad year from one that does not.

Finally, plan for the human side. A leveraged buyout changes the relationship between managers and employees, suppliers and customers. Staff will ask what has changed, and customers may ask whether the business is financially secure. A short communication plan, agreed with funders, avoids rumour. Executives should also consider their own position: personal guarantees, if given, should be limited and understood, and each executive should take independent legal advice on the terms of their equity and leaver provisions before signing.

Karter McKinley supports management teams and owners in preparing a buyout for funders: building the financial model, shaping the funding stack, preparing investor materials and running the process with lenders and investors. Where a transaction involves regulated activity, we work alongside FCA-authorised firms. This is general information, not investment or legal advice.