For some business owners, an exit strategy has been part of the business plan since day one. For others, a change of circumstances or advancing years is the catalyst to planning how best to leave your business.
There are several different types of exit strategy – from selling your stake or liquidating the business to acquisition by another business or a management buyout. The purpose of an exit strategy is to limit losses and maximise personal profit when you leave.
Whichever route to the exit you take, it is vital that your business is prepared for the change and in the best possible health. This can be achieved through systemisation to develop a streamlined, efficient, more profitable operation. Systemisation creates a model for managers and employees to follow that delivers the best service to clients and means that the business is scalable and saleable.
What are the benefits of a management buyout?
An MBO is generally a low-risk way of exiting a business for the seller, the details of the process are confidential and can be controlled. Many business owners find this favourable as it secures the future of the business.
How does a management buyout work?
MBOs have been popular for a few decades and with good reason. A successful MBO brings great rewards for the buyer and the seller, as long as the potential pitfalls can be avoided and all parties are prepared for 6-9 months of challenging commitment to the process.
The main questions asked prior to a MBO are:
- Is the company profitable, with a sucessful track record?
- Is the seller’s asking price reasonable?
- Is the company effectively managed?
- Is the right amount of ‘hurt money’ available?
How to fund an MBO?
Most management teams or individuals will require additional funding to carry out the buyout. Sources of finance include:
- Asset finance – enabling the business to leverage against company assets like property or stock
- Bank and private debt – banks may provide a cash flow loan repayable over 3-5 years and private debt funds are prevalent in the market
- Private Equity (PE) – where growth and the management backing is strong, PE funding is a viable option and provides additional support to expand the business
- Vendor loan notes – the seller may offer to help fund the transaction by leaving a consideration in the company as loan notes to be repaid over time
What are the tax implications of a management buyout?
The seller and the buying management team need to prepare for various tax considerations during an MBO. Some of these may include whether the MBO is a share or asset purchase, whether a NewCo will be created for the acquisition? If this is the case, the seller may be eligible for Business Asset Disposal Relief (BADR) and the Enterprise Investment Scheme (EIS) may be available for Private Equity partners. Stamp Duty, income tax and VAT must also be carefully considered and minimised.
Whether you are looking for future investment or have decided to exit your business, the earlier you start planning and getting expert advice on the process, the smoother the transaction will be. The team at CRM has many years’ experience of businesses changing hands and the tax implications that will arise. Get in touch with the knowledgeable, approachable experts on 01865 379272.
