Management Buy Outs: What you need to know

A Management Buyout (MBO) involves a company’s managers purchasing either:

• The shares of the company, or
• The trade and assets of the company (to become shareholder-directors).

The management team must decide between:

• Buying shares of the company (retaining the company’s history and allowing the use of any existing tax losses), or
• Setting up a new company to purchase the trade and assets of the target company.

Capital gains/loss considerations for a management buy out

• Share disposal for the individual selling their shares/assets.
• Seller might be able to benefit from Business Asset Disposal Relief (BADR) if conditions are met.
• For the company being sold, there is no break in their accounting period and it continues to trade as normal.

Buying at less than market value (shares)

• If employees (management) pay less than market value for shares, the discount is treated as employment income.
• They’ll be taxed on the difference between market value and the price paid.
• The shares are likely considered readily convertible assets, therefore subject to Class 1 NIC.

Buying at less than market value (trade and assets)

• If employees (management) pay less than market value for trade and assets, the same employment income tax rules apply as above.
• The taxable amount is the difference between market value and the amount paid.

Cost adjustment – CGT base cost

• Any employment income taxed due to undervalue will be added to the capital gains tax base cost of the shares/assets for future disposal calculations.

Loan to fund purchase

• Management will likely need to borrow funds to finance the share purchase.
• This is treated as a qualifying loan if it's used to buy shares in a close company or employee-owned company.
• Interest on the loan is deductible for income tax purposes.

Hive down

A hive down is another method to acquire a company.

It provides a way for a buyer (either a third party or the MBO team) to acquire a clean company (i.e., without historical liabilities) whilst still purchasing shares rather than the trade and assets directly.

This approach also allows the buyer to acquire only part of the target company.

Example

For example, say Mr A owns A Ltd. The management want to buy A Ltd. A new company is set up by Mr A, called Newco Ltd. A Ltd transfers its trade and assets to Newco Ltd – this is a normal transfer of trade and assets which would be a succession as 75% ownership is unchanged as Mr A owns at least 75% in both A Ltd (the seller company) and Newco Ltd (the buyer company).

The losses can transfer with the trade. In addition, as the history of the old company is not transferred, Newco Ltd is a clean company.

The management team (or third party) then buy the Newco Ltd shares from Mr A – this is a normal sale of shares. The management team (or third party) have purchased shares but in a clean company.

Next Steps

Please get in touch of you have any further questions regarding management buy outs