Not your average management buyout

14 May 2021

Management Buyouts (MBO’s) are a great “win-win” for both a selling shareholder and senior management of a company who are looking to have a stake in the business. They can take many forms, from a simple buyout whereby the shares in the company are simply transferred from the seller to the purchasing management to a more complex structure of deal. One such deal structure can include utilising the statutory method for reducing and cancelling share capital before reissuing to the purchasing party and here we go through a case study of a transaction recently concluded by the corporate team at Acumen explaining how such an MBO can take place.

What is an MBO?

An MBO does what it says on the tin. It is a sale of a company to one or more of the senior management team. From the seller’s perspective the ultimate outcome is the same as a normal sale, namely that they will dispose of part or all of their shares, but the process is more streamlined as the buyer is “internal” to the business.

Why sell via MBO?

There are a number of advantages to selling via an MBO. Firstly the seller does not need to engage in a lengthy marketing process in order to find a buyer. The buyer is already within the company, namely the management team. Selling to a management team also means that those taking over already have the expertise and understanding to help the business continue growing.

Generally speaking the process can be quicker as there will not be any lengthy due diligence process. The management will generally know the ins and outs of the business which also promotes a high change of successfully completing the deal as surprises are unlikely.

In the transaction our corporate team worked on there was an added benefit, namely that it allowed for succession of the business between family members. In this deal the owner of the company, a successful business which had grown over decades of trading, wanted to pass the business on to his son who was one of the senior management team and had a big hand in running the day to day operations. This was a very desirable outcome as it ensured a smooth takeover and safeguarding the relationships built within the industry by the family.

The Transaction

As mentioned above, a father wanted to transfer ownership to his son, our client here, but the transaction needed to make sense commercially and be structure in a tax efficient manner for all parties. This is where structuring the deal as a reduction of share capital made sense. The MBO was then completed via a subsequent issue of shares to our client.

A key part of this was ensuring the perceived tax benefits would actually come to pass. For this reason we always suggest speaking to advisers early when embarking on this type of transaction and this is what happened in this deal. A number of discussions were undertaken with our client and his accountants to ensure that pre-clearance was obtained from HMRC. This meant that all parties could have some comfort over the tax treatment of the deal.

In particular, on a purchase of shares, stamp duty is payable to HMRC at a rate of 0.5% of the total purchase price. This can be a costly affair for any purchaser, especially when the value of a business and its shares are in the millions, as was the case here. The reduction of capital structure of this MBO helped to mitigate this tax liability and in liaising with the accountants we could ensure that these benefits would be achieved.

A reduction of capital involves reducing the share capital of the company. It can involve reducing the value of each share or the number of shares issued. In this instance the company reduced the number of shares held by the seller.

In order for a company to successfully reduce its capital set procedures must also be followed in accordance with the Companies Act 2006. This includes the existing directors in the company making a solvency statement to confirm the company will be able to pay its debts for the next 12 months, and careful thought should be given to the accounts of the company prior to making such statement. We liaised with the client and his accountants in order to ensure this was all done properly and in a timely manner.

The reduction took place in two stages in order to ensure it complied with statutory requirements and each time there was a subsequent issue of shares in favour of our client. This ultimately allowed a ‘transfer’ in the shareholding of the company to take place between the buyer and seller without the express purchase of the existing shares. It is important to note that care must be taken if implementing this process and advance clearance from HMRC should be obtained.

The corporate team were able to successful complete the management buyout by engaging in early communications with our client and his tax advisors. This meant that everything could be organised in order to ensure the Companies Act requirements for a reduction of capital were met and that the tax treatment met our client’s expectations.

As a result the succession of the company involved a smooth transition. This allowed the father to start winding down to retirement with the comfort of knowing the business was in safe hands.

Take away

This transaction happened to involve a family business, and indeed shows a great means of achieving succession, but the principles apply to any MBO. Firstly, it is important to consider the structure of the MBO as there may be tax efficiencies which can be achieved with, for example, a reduction of capital. Taking early advise from legal and tax advisors is crucial. Once this has been done it may be the case that pre-clearance from HMRC as desirable. Finally it is important to ensure the legal documentation and processes are carried out carefully and our corporate team will be able to assist with this and explain the process every step of the way, whether you are selling or buying.

Whether you are looking to sell your company or are part of a company’s management and have been presented with the chance to buyout the current owners, if you would like to discuss the procedure in more detail please feel free to get in touch with Alvin Ittoo, Head of Corporate, on 01273 447 065

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