What is the difference between a management buyout and a leveraged buyout?

These two terms are often said in the same breath, which leads people to treat them as rivals. They are not alternatives. One is a label for the buyer. The other is a label for the funding. Once you see that, conversations with advisers and lenders become much easier to follow.

One term names the buyer

In a management buyout, the people buying are insiders: the managers or senior staff who already run the operation day to day. What sets it apart is their knowledge of the business and their place in it. They are buying something they know, from an owner they work with, which changes both the trust and the awkwardness of the negotiation.

The other names the funding

A leveraged buyout is about the money. The purchase is paid for largely with debt, backed by the business’s own cash flow and assets. The buyers could be managers, a competitor or an investor. What matters is how much of the price is borrowed. What a leveraged buyout of a small business involves is covered separately.

How the two combine

Managers with little savings often fund a purchase with borrowed money, so their deal is both. Managers who pay from savings and a seller’s patience may have a management buyout that is hardly leveraged at all. An outside buyer who borrows heavily has a leveraged buyout that is not a management one. Ask which of the two descriptions applies, and why.

What it means if you are the seller

If you are selling, ask the managers how they plan to pay and what you would be asked to accept. A heavily borrowed deal can mean your payment depends on how the business performs afterward. What a management buyout is explains the buyer side in more detail.