Clearing the MBO funding hurdle

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 in a material way needn’t stop you from structuring a successful deal.

As a first step towards completing a VIMBO, 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 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 and 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 waiting for your full consideration.

If you are receiving deferred payment, take care to plan your personal cash flows. In most cases you will trigger capital gains tax at the point of sale and therefore incur a tax liability on the full consideration – not the element received on day one. Although for cases involving unascertainable deferred consideration (for example, certain earn-outs), a further chargeable gain may crystallise on the later receipt of funds. Structures may be available to help you defer this liability, although they are subject to changes in tax legislation. In particular, where consideration is payable by instalments over a period exceeding 18 months, you may be able to make an election to pay any arising capital gains tax by instalments. That said, make the most of entrepreneurs relief if you can which could reduce your Capital Gains Tax rate to 10%. Our tax advisers can help you plan the best approach 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 do get in touch. All conversations are held in strictest confidence.

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