#476 Byron McFarland interviewed by Niels Brabandt on How Management Buy-Outs Succeed or Fail
Byron McFarland interviewed by Niels Brabandt on How Management Buy-Outs Succeed or Fail
Management buy-outs represent one of the most complex leadership transitions any organisation can experience. While often seen as a natural succession strategy, they are frequently misunderstood, poorly executed, and ultimately unsuccessful.
In a high-level interview, leadership expert Niels Brabandt speaks with management buy-out authority Byron McFarland, founder of The McFarland Group and author of The Bankable Buyer. Their conversation reveals the leadership, financial, and psychological realities behind successful management buy-outs.
Why most management buy-outs fail before they even begin
One of the most critical early warning signs identified by Byron McFarland is misalignment. When buyers are not aligned with each other, or when the seller fails to clearly communicate expectations, the buy-out process becomes vulnerable.
Trust, shared vision, and leadership alignment are essential. Without these, even well-structured deals can quietly collapse.
Equally important is the willingness of future owners to assume full responsibility. Byron McFarland emphasises that ownership is fundamentally different from management. Ownership requires accountability not only for operational outcomes, but for financial obligations, risk, and adversity.
The psychological reality of ownership that executives often underestimate
Many aspiring buyers underestimate the emotional and financial burden of ownership. Byron McFarland explains that true ownership requires personal risk. Buyers must be prepared to secure financing, often using personal assets as collateral.
Ownership is not defined by prestige or social recognition. It is defined by responsibility, resilience, and the ability to navigate adversity.
Leadership during adversity becomes the defining test. Leaders cannot predict outcomes, but they must control their response. Calm, clear, and decisive leadership separates successful owners from unsuccessful ones.
Why leadership transition must begin years in advance
A successful management buy-out is not an event. It is a process that unfolds over multiple years. Byron McFarland recommends a structured, multi-year transition period in which future owners gradually assume responsibility.
This allows financial institutions to build confidence in the new leadership team and ensures operational continuity.
Failure to transfer leadership capability is one of the most common causes of post-acquisition collapse. When business performance depends entirely on the previous owner, the organisation becomes fragile.
The most important question every founder must answer
Perhaps the most powerful insight Byron McFarland shares with Niels Brabandt is deeply personal. Every founder must ask themselves one fundamental question.
Am I ready to let go?
Leadership identity is often intertwined with ownership identity. Letting go requires emotional readiness as much as financial readiness.
Founders who remain psychologically attached to control can unintentionally undermine the new leadership.
The strategic importance of preparing the organisation for transferability
Byron McFarland advises business owners to always operate their business as if it could be sold. This includes developing leadership teams, transferring knowledge, and ensuring the organisation does not depend on a single individual.
This approach protects organisational value and creates strategic flexibility.
Leadership alignment, financial preparation, and organisational readiness determine whether a management buy-out creates long-term success or long-term failure.
Conclusion: Management buy-outs are leadership transitions, not financial transactions
The conversation between Byron McFarland and Niels Brabandt makes clear that management buy-outs are not primarily financial events. They are leadership transformations.
Successful management buy-outs require trust, preparation, leadership maturity, and emotional readiness.
Executives who approach management buy-outs as strategic leadership transitions rather than financial transactions position their organisations for sustainable success.
Niels Brabandt
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Mehr zu diesem Thema im dieswöchtigen Podcast und Videocast: mit Niels Brabandt: Videocast / Apple Podcasts / Spotify
Das Transkript zum Podcast und Videocast befindet sich unter diesem Artikel.
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Kontakt: Niels Brabandt on LinkedIn
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Niels Brabandt ist Experte für Nachhaltige Führung (Sustainable Leadership) mit mehr als 20 Jahren Erfahrungen in Praxis und Wissenschaft.
Niels Brabandt: Professionelles Training/Seminare/Workshops, Speaking/Vorträge, Coaching, Consulting/Beratung, Mentoring, Projekt- & Interim-Management. Event Host, MC, Moderator.
Podcast and Videocast Transcript
Niels Brabandt
You've probably heard of management buyouts, and probably some of you might now roll the eyes and say, "Yeah, I heard of that. I experienced it, and it didn't go too well." The question is: how, actually, can a management buyout work well? And I have a global expert on the matter with decades of experience with me here today. Hello and welcome, Byron McFarland.
Byron K. McFarland
Well, hello. Glad to be here.
Niels Brabandt
Thank you very much for taking the time. So we get straight into it. So when you look at UX, BTS and you are also the author of the book, The Bankable Buyer, so you have the experience, you publish on the matter. There we are. Excellent. Show it in the camera so people can actually see it. Excellent book, by the way. I can highly re-recommend that.
Niels Brabandt
In your experience you say that management buyouts can succeed or quietly fail. What are the earliest warning signs that an MBO, in your opinion, is probably not heading in the right direction, or rather in the wrong one?
Byron K. McFarland
The seller isn't communicating what he wants, and the buyers are not in sync with each other. So if I see interpersonal conflict, that they're not in arm in arm on what they want to do, those tend to be the high-risk ones.
Niels Brabandt
Yeah. Excellent. So.
Byron K. McFarland
Because these transactions take trust and time, and they're—it's a series of activities.
Niels Brabandt
Excellent. So from your experience, what do you think? What is the aspect that actually breaks first? Is it the deal structure, the leadership alignment, the culture, or a completely different aspect? What are the first aspects that actually break before everything falls apart?
Byron K. McFarland
Buyers are not stepping up and assuming the responsibility of the seller.
Niels Brabandt
Okay. So how to do that better?
Byron K. McFarland
Seller offboards responsibility as much as possible to the buyers. The buyers prove they can play the role. And then you are showing to the financial institution, the bank, that the buyers are capable of running this business without the seller making decisions.
Niels Brabandt
What do you think are the aspects that they usually underestimate? Because I know from personal experience, some people say, "Hey, I finally reached the stage. I sell the business, so money will pour in very quickly, and everything is going to go very smooth." So what, in your experience, are the main aspects where you think that the underestimation of effort or whatever is needed is taking place?
Byron K. McFarland
The buyers don't understand the amount of stress that comes with running, being responsible for the business outcome, having debt that they are obligated to repay using after-tax profit, and somehow or another, either the economy or the market or a client, they have some adversity, and they haven't had that adversity in the past. And so adversity is the real test. You almost want to manufacture adversity, if possible, to test their mettle.
Niels Brabandt
So when now someone comes to you and says, "Hey, adversity is something which happens, but you can never predict what's happening," would you agree, or would you say, "No, you can predict certain aspects"?
Byron K. McFarland
You can predict response. You can't predict outcomes. You have a response, clear-headed, thoughtful, giving people direction, not crawling into a ball or losing your mind and yelling, or keeping control of yourself. That is usually the test of their ability to become the owner.
Niels Brabandt
So let's say a key employee assesses whether they should genuinely want ownership, or maybe they just think maybe they just want more influence. How can they know? Because when someone says, "I am going to buy this business," maybe they are in a sales role, and they know the business inside and out. They think probably between being in the business and owning the business is a massive difference. But how can they assess if they are really up to the game?
Byron K. McFarland
Are you willing to sign on the line of credit and put your house or any of your other savings up as collateral in case the business needs those resources to support itself?
Niels Brabandt
That is a pretty strong ask for. Do you think that the majority of people who think of owning a business are actually up to that?
Byron K. McFarland
I have found, no, that not everyone is up to that. And that is something business owners will benefit from sharing with their employees who want to become owners early so that they can emotionally understand the impact, share it with their spouse or life partner, that I'm doing this, and here are the implications of it.
Byron K. McFarland
It's like a mountain climber with basically a ball and chain tied to their ankle. You're climbing the mountain, great. But if you slip and that ball goes down a crevasse, you're going with it.
Niels Brabandt
Yeah, absolutely. And do you think it can play a role that some people look at it from the point of view and say, "Look, I'm in this business for long as a salesperson. However, I'd like to live the life of the owner, hang out in the country clubs, be someone in the community, being known for running this kind of business"? And maybe that is the wrong mindset, or what's your take on that?
Byron K. McFarland
I think that is what people see and want. There's a lot of social cachet that comes with that type of freedom. It's been my experience. You don't necessarily need to be an owner to enjoy that.
Byron K. McFarland
I have plenty of clients who we compensate their key employees like an owner so that they're able to be a member of a club, able to enjoy the trappings of the country club life without being an owner because the conditions weren't right for ownership for them.
Niels Brabandt
So what would you say? How does a good transition plan look like, let's say, 12 months before selling the business? How to set up a proper good transition plan?
Byron K. McFarland
The ideal transfer to management is a multi-year, multi-step experience. So typically, I would say 3 to 5 years in advance of when you want to hand over day-to-day responsibility and get out.
Byron K. McFarland
You would sell your key employees 25 to 40% of the company on a note. They would ideally get that note from a bank. They would have created some collateral while they were working for you through incentives that were being cashed in and now used as a down payment.
Byron K. McFarland
They would work their butt off to pay that note off in 3 to 5 years, and then you would sell them control or all of your stock in the third or the fifth year when the bank was confident that the buyers were running the day-to-day, that the cash flow was sufficient to cover the debt service.
Byron K. McFarland
Because normal banks are looking at a debt service coverage ratio, which is they want $1.25 of after-tax cash for every dollar of principal and interest. That's what they call the debt service coverage ratio. So it has to work with the cash flow from the business.
Niels Brabandt
Excellent. So I'll just give you one. This morning, I had a phone call with people, and someone thinks of selling their business. I have the notes right here. And one owner told me, "Well, he's a bit late with it. He needs to sell. His health is going down quite a bit. He maybe waited a bit too long, and he now plans to sell the business within 12 weeks." What is your opinion on that?
Byron K. McFarland
If he has a buyer lined up, it's possible. But it's been my experience that it takes for an outside. The only transaction that would work that fast is if he was willing to finance it and it was a manager that knew the business and the sale was no cash or very little cash and a big note, and the note was repaid with profits from the company. And it's probably a ten-year note. If it's not that kind of a buyer, if it's not an insider that's being given that generous opportunity, an outsider, there's no way it gets sold in 12 weeks.
Niels Brabandt
Okay. And that's a very good point you mentioned here. I'll give you one example. With one of my former clients, they weren't a client because then the new owner brought in someone else. A business is running for 21 years. There is no buyer lined up, so they go for the bank. The bank connects the dots and then sells the business that is running for 21 years, a profitable for 21 years. Two years later, after the sale done, close down. How is that even theoretically possible that sometimes we see businesses working out, working well for multiple decades, and within a couple of years, they still fail? How is that possible, in your opinion?
Byron K. McFarland
Chances are the majority of the results were being created by the person who sold it and left.
Niels Brabandt
So people believe the key man risk. How do you want to call that?
Byron K. McFarland
Yeah. So you had basically what happened there. I'm going to presume that the earnings that it was realizing were being created by the person who sold it.
Niels Brabandt
He was a big salesperson in there.
Byron K. McFarland
And when they sold it, they didn't create any transferability of those earnings so that the buyer could sustain it into the future and hand off those roles to somebody else or have somebody that is on the ideally, somebody that's already on the team performing those roles at a high level, motivated to stay.
Niels Brabandt
Excellent. So how, in your opinion, should decision makers think about financing when many people say, "Look, financing, we now sell the business and there's momentum in there. People are motivated." And then someone comes around the corner, "Oh, we need this number and this papers." And actually, in their opinion, it kills the momentum they actually have. So how should decision makers, in your opinion, think about financing and risk without killing the momentum in the first year straight away?
Byron K. McFarland
So in the financing, is the scenario they're selling the business to management or management's buying in incrementally? Or give me a little bit more context. I'm sorry I didn't get that.
Niels Brabandt
So when someone says, "I am selling the business," and then they have probably lots of momentum. Someone is very fascinated about that person steps up. Everything is in a really good mood. And someone comes along, maybe even someone like you, with all the paperwork and the financing and this and that, and they sell. This kills the momentum. Let's just get things done and not stick around with all this paperwork all the time. So what does the decision maker probably think about financing and risk without killing that momentum?
Byron K. McFarland
Oh. Collaborate with your team as early as possible on the preparation for the business to be transferable, whether it's going to be sold this year, next year, or five years from now. Always be running the business like somebody's looking to buy it. Then your momentum will never be impacted in a transaction.
Byron K. McFarland
So we advise our clients, get buy-in from your leadership team on the goal. First of all, as the owner, tell your leadership team where we're going, why it's important to you, to you as an owner, and then what role you need them to play and what outcomes. And then explain to them what's in it for them when you win. And if you do those four things and a buyer presents themselves, you'll have momentum all the way through the transaction.
Niels Brabandt
Excellent. If you now, with all the experience you have, someone would ask you, "What's one?" Just one uncomfortable question every founder should answer before considering a management buyout. What is that question, in your opinion?
Byron K. McFarland
Am I ready to let go?
Niels Brabandt
Do you think there are many people who are not really ready to let go?
Byron K. McFarland
I found that that tends to be the most difficult transition, is the owner transitioning to not being the owner.
Niels Brabandt
What do you think about a situation where they say, "Oh, I'm going to sell the business to you, but I'm always going to be here as the advisor. I'm going to have my room in the office, but I'm just the advisor." Do you think this works?
Byron K. McFarland
Yes, we do it all the time. If the relationship exists of mentor, not supervisor, meaning that I am not checking in on progress, I am just there when you need me for the once-in-a-lifetime problem that you've not seen as the buyer. And this person has seen because they were there in 2007, 2009 when the US economy crashed. They navigated all those challenges, and we haven't had anything since. If that should come back, you'd sure like to have somebody in your corner to talk to that was safe.
Niels Brabandt
And I think you made an excellent point here, mentor, not supervisor, because probably you also saw situations where someone just was in the office but still basically running the whole business while the new owner was already sidelined from the very beginning then.
Byron K. McFarland
It's the most common relationship in family businesses where the previous generation sits there and kind of oversees and is controlling things, but they're putting the newest generation kind of out on the street as the face of the company.
Niels Brabandt
So tell us a bit more about the bankable buyer. If someone now buys your book, what can they expect from the bankable buyer?
Byron K. McFarland
A great story about a business owner named Steve who is confronted with a challenge in the form of a medical condition with a dear friend and partner that he wants to resolve for him. And in the process of doing that, has the realization that it's his time as well, and he needs to think about what he wants to do because he's age-appropriate to be retired.
Byron K. McFarland
And so from there, he's put on the journey of being introduced to advisors and having crucial conversations with his family, with his team, collaborating with these professional advisors and his team, and overcoming the challenges of thinking through and ultimately assembling a sustainable transition plan.
Niels Brabandt
Excellent. So no one needs to be worried to get a book where it's all economic theory, numbers here, numbers there. It's all hands-on how to do it in the real world based on probably a story. Maybe that happened in one way or the other. Maybe with your experience, it happened one way or the other.
Byron K. McFarland
It's very much an avatar nails of my experiences. And the reviews that I've received from book blogs is that it's a really good story and it defies expectations in that it isn't a spreadsheet-rich, terminology-thick experience. It's something you can read. I get it. And then it combines the story with some reflection questions at the end of each chapter. Here's what you read. Here's what you want to be thinking about from a professional's from my perspective.
Niels Brabandt
Yeah, excellent. Also, because when we got in touch about the podcast, I can tell you most people who get in touch and talking about management buyout basically have the same CV. Many people say, many people I see who apply to be on this podcast basically say, "Okay, look, here's my rich family. Here's my elite degree." And I was very happy to see that you come from a very different background. You were an advisor, then started your business, then had, I think, McFarland and Associates, and then now the McFarland Group. So you really built it from the scratch.
Byron K. McFarland
I did. I created something that didn't exist.
Niels Brabandt
Yeah, excellent. That is probably the biggest achievement. Also, proof of concept, of course, proof of track record that you are able to not only talk about it but also walk the talk.
Niels Brabandt
If someone's now sitting there to wrap this interview up and says, "Okay, look, I'm thinking about a management buyout, but I'm in this business for so long, I don't even know where to start."
Niels Brabandt
If someone asks you, "What are your top three points where to start from?" What's your advice for them?
Byron K. McFarland
Reflect on your role. What am I doing here that I really, really love? And what could I be? What would I be willing to give up? Start with what you're doing. And then ask yourself, "If I wasn't doing this, what could I be doing with my time that would be enjoyable?" And create some form of magnet to pull you towards a future. And that usually is the place to start. It's not with doing the math or anything technical. It should be introspection.
Byron K. McFarland
Talk to a friend or family member about what you love, about what you do and what you don't. And then from that, see if you can't crystallize the thing that would be really exciting for you to do. If you could give your if you could give the responsibilities that you have today that you don't enjoy to a team member, and in order for them to assume more responsibility, you would make them an owner and you would buy time freedom, then that's a fair exchange.
Byron K. McFarland
It's selling responsibility for time freedom. That's what I'm doing, is I am literally coaching my clients buy time freedom by transferring responsibility to people who are probably, "Please give me that responsibility. I'm willing to do it. I know what you're doing. I can do it. Just give it to me and let me do it my way." That's the place to start.
Byron K. McFarland
If you can do that, then talk to your financial advisor and ask them, "What do I need from this business in order for me to be financially independent?" Then once you know that number, talk to a CPA or evaluation person and just ask them to value your business. Spend $3,000 to get an opinion of value. Compare that number to what your financial advisor said, and now you know how secure you might be. And that's where my clients start.
Niels Brabandt
Perfect.
Byron K. McFarland
Know what you want to do, know what you need, and know what you have.
Niels Brabandt
Brilliant. If someone else says, "Hey, I think I really need your advice," how can people get in touch with you?
Byron K. McFarland
My website, themcfarlandgroup.com, LinkedIn, Byron K. McFarland, email byron@themcfarlandgroup.com. I'm very active on LinkedIn. I post videos and written text and that. So anybody could find me on LinkedIn pretty easy or my website.
Niels Brabandt
Perfect. I think these are the perfect final words. So when you think of management buyout, you know who to talk to right now. Byron McFarland, thank you very much for your time.
Byron K. McFarland
Thank you very much for allowing me to join your audience.