Clearing the MBO funding hurdle

You want to sell your business to the management team and they want to buy, but there’s a problem. Your management team can’t personally find the funds to pay you a material consideration. Is that the end of the story?

It needn’t be. You could consider a vendor initiated buy out (VIMBO).

Although it’s always recommended that management teams put some equity into buy out transactions, their inability to do so in a material way needn’t stop you from structuring a successful deal.

As a first step towards completing a VIMBO, you should explore whether your business has healthy cash flows and cash balances. These will help form part of the initial consideration, which could then be supplemented by raising bank funding.

Next, think about how long you would be happy to wait for the remainder of the consideration to be paid. If you don’t want to wait long, we would recommend speaking to a private equity or venture capital firm to see if your management team and the business are ‘backable’. If they are, this should help you to crystallise the full consideration either upfront or over a short period of time.

Deferred payment plans
If third party equity funding is not possible or not desired by yourself or your management team, you will need to agree a deferred consideration payment plan covering a number of years. This should include protections to compensate you for having to wait to receive your full payment. For example, as well as receiving regular interest on the outstanding deferred amount, you could remain involved as a consultant and board member until you are fully repaid. The agreement could also restrict the business from making material capital purchases or salary increases while the consideration is outstanding, and include key performance indicators for the management team. Such measures can give you some downside risk protection while you are awaiting your full consideration.

If you are receiving an element of deferred consideration, take care to plan your personal tax cash flows. Often, you will be happy to pay all the tax up front (i.e. on both the initial and deferred consideration) so as to only suffer tax at 10%.  Alternatively you may want to be able to defer the tax liability on the deferred consideration and be prepared to suffer tax at 20% for the privilege. Either way you will need consider the timing of tax cashflows so that structuring can be planned up front.

In cases where there is some “unascertainable” (i.e. indeterminate) deferred consideration (e.g., where deferred consideration is at least part calculated on a future earn-out), a separate chargeable gain may crystallise on the later receipt of the deferred element. Entitlement to Entrepreneurs Relief can be lost on such sums and consideration should be given to ensuring that the correct structure of consideration is put in place in such cases.

Our tax advisers can help you plan the best approach for structuring consideration and for settling any tax liability before you embark on a transaction.

If you’d like to find out more about how to achieve a VIMBO, please get in touch. All conversations are held in strictest confidence.
 

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