A common objection from founders is:
“My people don’t have the money to buy me out.”
This is rarely true. Internal buyouts — whether through a management buyout (MBO), employee-led buyout (ELBO), or employee ownership trust (EOT) — are not funded from employees’ personal savings. They are financed by the business itself, using cash flow, profits, and carefully structured lending.
With the right structure, internal buyouts can deliver fair value to the founder while making ownership affordable for employees.
Core Funding Mechanisms
1. Vendor Finance
The founder agrees to be paid over time, usually from future profits.
- Advantages: Allows succession without upfront capital; keeps control inside the business.
- Risks: The founder’s payout depends on the ongoing performance of the business.
2. Bank or Non-Bank Lending
Banks or alternative lenders provide loans secured against business cash flow or assets.
- Advantages: Provides immediate liquidity for the founder.
- Risks: Adds leverage to the business; requires consistent cash flow and compliance with covenants.
3. External Aligned Capital
Impact funds, family offices, or minority investors contribute capital to help fund the buyout.
- Advantages: Provides liquidity; may bring strategic value.
- Risks: Introduces external shareholders whose objectives may differ from employees or founders.
4. Profit Recycling via Trusts (EOT/ESOP Models)
The business makes contributions into a trust, which repays the founder and holds shares for employees.
- Advantages: Inclusive; no personal risk for employees; preserves independence.
- Risks: Complex to structure under current Australian law; requires strong governance.
5. Hybrid Approaches
Most internal buyouts blend two or more of the above. For example: vendor finance combined with bank debt, or management equity combined with an EOT.
- Advantages: Flexible; balances liquidity and risk.
- Risks: More complex governance; requires careful legal and financial design.
Innovation: Surety-Backed Guarantees for Deferred Consideration
One of the biggest barriers to vendor-financed deals is the founder’s fear: “What if I don’t get paid?”
Blue Harbour is working to bring a solution to market: a surety-backed guarantee for deferred consideration.
- A guarantee is issued by a surety provider, backed by an insurer.
- If the buyer defaults on vendor finance repayments, the guarantee ensures the founder is paid.
- The insurer then recovers funds from the business or successors.
Why this matters:
- Founders gain security and confidence to proceed with vendor finance.
- Successors gain flexibility, as more founders are willing to agree to staged payments.
- The market benefits because more internal transitions can proceed without deadlock over risk.
This innovation could unlock a new wave of MBOs, ELBOs, and EOTs in Australia by reducing founder anxiety and making vendor finance more secure.
Risks of Poorly Structured Financing
If funding is mishandled, it can destabilise the business. Common pitfalls include:
- Over-leverage: Loading the business with excessive debt.
- Unrealistic assumptions: Overestimating profitability or ignoring working capital needs.
- Weak governance: Failing to embed reporting, decision rights, or dispute resolution.
- Founder overhang: Founder remaining too involved, confusing authority and cash flow.
Case Snapshot: Tailored Freight
In 2025, Victorian transport business Tailored Freight collapsed after a management buyout. The deal relied heavily on debt, with repayment terms that proved unrealistic. When key executives departed and revenue fell, the business could not service its obligations. It went into administration owing more than $4 million, with staff losing jobs.
Lesson: Poorly structured financing can destroy a business and its legacy. Stress-testing affordability, embedding governance, and using protection mechanisms like surety-backed guarantees are essential to avoiding this outcome.
Funding Principles
For founders and successors, five principles help ensure sustainable financing:
- Affordability first: Repayments must be based on realistic forecasts, not optimistic ones.
- Clarity in agreements: Terms, schedules, and fallback clauses should be clearly documented.
- Balance: Do not over-leverage; protect business health.
- Governance discipline: Reporting and accountability frameworks are non-negotiable.
- Coaching support: Founders and new owners both benefit from guidance in navigating financial responsibility.
Key Takeaways
- Internal buyouts are financed by the business itself, not employees’ savings.
- Common tools include vendor finance, bank debt, external aligned capital, trust-based models, and hybrids.
- Blue Harbour is helping pioneer surety-backed guarantees to protect founders in vendor-financed deals.
- Poor structuring, over-leverage, and unrealistic assumptions are the biggest risks.
- Governance, coaching, and preparation make financing more resilient and sustainable.
Next Chapter: Legal and Tax Considerations in Australia
We will explore how Australia’s tax concessions, employee share scheme reforms, and trust laws shape internal buyouts, and where reform is still needed.