Management buy-outs in South Africa: structuring, funding and tax

October 15, 2026

A management buy-out (MBO) happens when the people who run a business buy it from its owners. It is one of the most common exit routes for founders and family shareholders in South Africa. The buyers already know the business, its customers and its staff, and the seller gets an exit without handing the company to a competitor.

The usual problem is money. Managers rarely have the cash to pay the full price upfront, so most MBOs rely on vendor finance, earn-outs and bank debt. The transaction has to be structured so the business itself can service that debt, and so that the debt is serviced in a tax-efficient way. That is where most of the legal and tax complexity lies.

This article covers how MBOs are typically structured, the funding tools used, the Companies Act approvals involved, and the main tax issues buyers and sellers should plan for.

Why management buy-outs are different

An MBO is still a sale of shares or a business, but it differs from a sale to a third party in several ways:

The buyers know more than the seller. Managers often understand day-to-day operations better than the owners. Sellers therefore tend to resist giving extensive warranties, and buyers may find it hard to claim for problems they knew about.
Managers are conflicted. While negotiating to buy, managers remain employees and often directors of the target. They owe duties to the company, including duties of good faith and confidentiality, and must manage conflicts of interest carefully.
The seller often stays exposed. Because the price is frequently paid over time, the seller is effectively a creditor of the buyer and has a continuing interest in the business performing well.
The business funds its own acquisition. The target’s future cash flow usually repays the acquisition debt, which brings company law restrictions on financial assistance and distributions into play.

A typical MBO structure

There is no single template, but many South African MBOs follow a variation of this structure:

New holding company. The management team (often through a family trust or personal holding entity) incorporates a new company (“BidCo”) to act as the purchaser.
Share purchase. BidCo buys all the shares in the operating company (“OpCo”) from the existing shareholders. Part of the price is paid on completion, part is left outstanding on loan account (vendor finance), and part may be payable later as an earn-out.
Security for the seller. BidCo pledges the OpCo shares to the seller as security for the outstanding price, often with a right for the seller to take the shares back if BidCo defaults.
Bank funding and a “debt push-down”. To bring external funding to the level where the operating assets and cash flows sit, the business (or part of it) may be transferred to a new subsidiary within the group, which raises bank debt against those assets.
Cash moves up the group. The cash from the bank funding is moved up to BidCo, often by way of an intra-group dividend, and BidCo uses it to pay the seller.

Each step has its own legal and tax consequences, and the sequence matters. A step that is harmless on its own can trigger a tax claw-back or a company law problem when combined with the others.

Funding the deal

Vendor finance

The seller agrees to receive part of the price over time. This bridges the gap between what managers can raise and what the seller wants. The key terms to negotiate are:

the repayment schedule and whether interest is charged;
security, typically a pledge and cession of the shares and a reversion right on default;
restrictions on BidCo and OpCo while the debt is outstanding, such as limits on dividends, new debt and the disposal of key assets;
subordination arrangements with the bank, which will usually insist that its loan ranks ahead of the seller’s.

Earn-outs

An earn-out makes part of the price depend on the business’s future performance, for example a fixed amount after two years or a multiple of EBITDA after a longer period. Earn-outs help bridge valuation gaps but are a common source of disputes. The agreement should clearly define:

how the financial metric is calculated, including accounting policies and permitted adjustments;
what the buyer may and may not do during the earn-out period (for example, moving revenue to another entity or loading the company with group costs);
the seller’s information rights; and
how disputes about the calculation are resolved, usually by an independent accountant acting as an expert.

Bank and private equity funding

Banks will lend against the cash flows and assets of the operating business, not against the managers’ personal balance sheets. Expect requirements for security over operating assets, financial covenants and personal suretyships in smaller deals. Where a private equity investor backs the managers, the deal becomes an institutional buy-out with management equity, and the shareholders’ agreement between the investor and management becomes central.

Companies Act considerations

Financial assistance (section 44)

If OpCo provides financial assistance (such as a loan, guarantee or security over its assets) to help BidCo acquire OpCo’s own shares, section 44 of the Companies Act 71 of 2008 applies. The board may only authorise it if:

the shareholders have approved it by special resolution within the previous two years, either for the specific recipient or for a category of recipients;
the board is satisfied that, immediately after providing the assistance, the company would satisfy the solvency and liquidity test; and
the terms are fair and reasonable to the company.

Section 45 of the Companies Act separately regulates financial assistance to related and inter-related companies, such as loans between group companies. Do not confuse it with section 45 of the Income Tax Act, discussed below. Both often apply to the same MBO.

Distributions (section 46)

A dividend by OpCo to BidCo to fund repayment of the acquisition debt is a distribution. The board must authorise it and must reasonably conclude that OpCo will satisfy the solvency and liquidity test immediately afterwards. Directors who vote for a distribution knowing it fails the test can be personally liable under section 77.

Disposal of the business (sections 112 and 115)

A disposal of all or the greater part of a company’s assets or undertaking ordinarily requires a special resolution of shareholders. There is an exception for disposals between a wholly-owned subsidiary and its holding company, or between wholly-owned subsidiaries of the same holding company. Moving OpCo’s business to a sister company after the share purchase will often fall within this exception, but the group structure must be checked at the relevant time.

Directors’ conflicts (section 75)

Managers who are also directors of OpCo have a personal financial interest in the transaction. They must disclose that interest and generally may not take part in the board’s consideration of the matter. Independent directors or the shareholders may need to approve the relevant resolutions.

Takeover regulations

The Takeover Regulations apply to “regulated companies”. A private company is generally only regulated if its memorandum of incorporation says so, or if more than 10% of its shares have changed hands within a 24-month period. Check the MOI early.

Tax considerations

Tax often drives the structure of an MBO. The main issues are:

Securities transfer tax

Securities transfer tax of 0.25% applies to the transfer of shares in an unlisted company. The company is liable to pay it, but it is recoverable from the purchaser.

Interest deductions on acquisition debt

Interest is only deductible if the debt is incurred in the production of income. Debt raised by a holding company simply to buy shares does not usually meet that test, because shares produce exempt dividends. There are two common solutions:

Section 24O allows a deduction for interest on debt used to acquire equity shares in an operating company, where the acquirer becomes a controlling group company in relation to it, subject to conditions.
Debt push-down. Placing the debt in the operating entity that uses the acquired assets to earn income. Interest on debt used to buy income-producing business assets is generally deductible. Under the “chain of deductibility” principle, interest on a loan used to refinance an earlier deductible loan is also deductible.

The section 23N limitation

Section 23N of the Income Tax Act limits interest deductions on debt used to fund a “reorganisation transaction” (which includes a section 45 intra-group transaction) or an “acquisition transaction” (a section 24O share acquisition), for the year of the transaction and the following five years. In broad terms, the deduction is capped at net interest income plus a percentage of “adjusted taxable income”, which is a tax-based measure similar to EBITDA.

Currently, that percentage is calculated from a formula linked to the average repo rate, subject to a ceiling of 60%. Legislation enacted in 2024 would replace it with a fixed 30% for years of assessment starting on or after 1 January 2027, but the 2026 Budget Review proposed withdrawing that change for section 23N. Buyers modelling their debt capacity should confirm the position for their years of assessment.

Debt used to buy assets outside a section 45 transaction is generally not subject to section 23N. This is one reason parties sometimes split an asset transfer, with some assets moving under section 45 and others outside it.

Section 45 intra-group roll-over relief

Where business assets move between two South African resident companies in the same “group of companies” (broadly, 70% or more common ownership), section 45 of the Income Tax Act defers capital gains tax and recoupments. The seller is treated as having disposed of the assets at their tax cost, and the buyer steps into the seller’s shoes. This is valuable for assets such as intellectual property and goodwill, whose market value usually far exceeds their tax cost.

The relief comes with anti-avoidance claw-backs that MBO parties must plan around:

De-grouping (section 45(4)). If the transferee leaves the group within six years while still holding the assets, the deferred gain is triggered. This is important if the managers might sell, or bring in an outside investor, within six years.
Early disposal (section 45(5)). If the transferee disposes of the assets within 18 months outside another roll-over provision, the gain is ring-fenced and taxed.
Extraction of proceeds (section 45(4B)). If the consideration received for the section 45 transfer (or more than 10% of value derived from it) is, within two years, disposed of to a person outside the group for no consideration, for less than an arm’s length price, or by way of distribution, the companies are deemed to have de-grouped. Where cash from a section 45 transfer is paid up the group and then on to the seller, the transaction must be structured carefully so it does not fall foul of this rule.

Section 45 applies automatically if its requirements are met, unless the parties jointly elect that it should not apply. Where some assets should move outside section 45 (for example, recently bought equipment with no built-in gain), the sale agreement should say so expressly and allocate the price to each asset or category of assets.

VAT: sale of a going concern

The transfer of a business between VAT vendors can be zero-rated under section 11(1)(e) of the VAT Act as the supply of a going concern. The requirements include that both parties are registered vendors, that they agree in writing that the enterprise is disposed of as a going concern, that it is an income-earning activity on the date of transfer, and that all assets necessary to carry on the enterprise are transferred. If the requirements are not met, VAT is charged at the standard rate. The purchaser can usually claim it back as input tax, but it creates a cash flow cost in the meantime.

Dividends within the group

Dividends between South African resident companies are generally exempt from income tax under section 10(1)(k) and from dividends tax under section 64F(1)(a). However, dividends paid out of contributed tax capital are treated differently, and the section 45(4B) claw-back may apply.

Timing of the seller’s tax on deferred and earn-out payments

As a rule, the seller is taxed on proceeds in the year they accrue, which is when the seller becomes unconditionally entitled to them (CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A)). This can create a mismatch where the seller pays capital gains tax now on a price received over several years.

Two rules help:

Conditional amounts. An earn-out that depends on uncertain future performance is a true condition. It should not accrue until the condition is fulfilled.
Section 24N. Where more than 25% of the price for shares is payable after the year of disposal and is based on the company’s future profits, section 24N defers accrual of the deferred portion until it becomes due and payable. Its requirements are strict. Among other things, the seller and purchaser must not be connected persons after the disposal, and the purchaser must be obliged to return the shares if it fails to pay.

General anti-avoidance rules

A multi-step MBO structure that produces tax benefits may attract scrutiny under the general anti-avoidance rules in sections 80A to 80L. The best protection is a clear commercial rationale for each step, which should be documented at the time. The law on how far taxpayers may choose the most tax-efficient structure (the “choice principle”) is still developing. For larger transactions, an advance tax ruling from SARS may be worth considering.

Employees and contracts

Employees. A share sale does not change the employer, so employment contracts are unaffected. But if the business is moved to a new entity as a going concern, section 197 of the Labour Relations Act 66 of 1995 applies. The employees transfer automatically to the new employer on terms that are, on the whole, no less favourable.
Contracts. Customer, supplier, lease and licence agreements may contain change-of-control clauses, which can be triggered by a share sale. They may also prohibit assignment, which matters if the business moves to a new entity. Review key contracts early and obtain consents where needed.
Licences and B-BBEE. Regulatory licences and permits may not be transferable. A change in ownership may also affect the business’s B-BBEE scorecard.

Competition law

An MBO is a merger under the Competition Act 89 of 1998 if the buyer acquires control. If the combined turnover or asset values of the parties meet the prescribed thresholds, the deal must be notified to the Competition Commission and may not be implemented until approved. Many owner-managed businesses fall below the thresholds, but this must be checked before signing.

The key agreements

A typical MBO involves:

a sale of shares agreement between the seller and BidCo, covering price, vendor finance, earn-out, warranties, restraints on the seller and conditions;
security documents, such as a pledge and cession of shares in favour of the seller and security in favour of the bank;
a sale of business agreement if assets move within the group, with a clear price allocation and VAT going concern provisions;
funding agreements with the bank, and an intercreditor or subordination agreement between the bank and the seller;
a shareholders’ agreement among the management buyers (or between management and an investor), covering control, good and bad leaver provisions, deadlock and exits; and
the necessary board and shareholder resolutions under sections 44, 45, 46 and 115 of the Companies Act.

Practical checklist

Agree the commercial deal first, including price, how much is deferred, earn-out terms and security, before settling the structure.
Get tax advice early. The tax structure determines the legal steps, not the other way round.
Map the six-year horizon. If the managers may want to sell or bring in an investor within six years, model the section 45 de-grouping consequences now.
Allocate the price. A clear allocation across assets avoids disputes with SARS and between the parties.
Manage conflicts. Managers should disclose their interest, respect confidentiality and avoid using company resources for their own bid without approval.
Test solvency and liquidity at each step. Every distribution and every act of financial assistance needs board approval on a proper basis.
Draft the earn-out defensively. Most earn-out disputes come from vague definitions and unrestricted post-completion conduct.
Plan for the shareholders’ agreement among managers. Teams that buy together do not always stay together.

How O’Reilly Law can help

We advise founders selling their businesses, management teams buying them, and the funders who back them. We help to structure the deal, draft and negotiate the transaction documents, prepare the Companies Act approvals, and coordinate with tax advisers and banks so that the legal steps match the tax plan. Speak to our business structuring team.

This article is general information and not legal or tax advice. The tax consequences of an MBO depend on the specific facts and structure, and specialist tax advice should be obtained. Correct as at October 2026.