BACKGROUND

A business owner who came to see us recently was thinking he needed to plan for his retirement sale but did not know how best to go about it.  The initial discussion was about looking after his team through share options and we were told he had recently had an approach from a competitor.  You may be in a similar position – but what should your first step be?  Who should you speak to?  The owner here was in his 60’s and held 100% of the shares of his company.

The competitor who had contacted him was based 75 miles away and therefore a trade sale would likely lead to redundancies.  You may want to ask yourself how you would feel in that situation early on in the planning phase.  This is what we were able to help our client do here.

From experience we knew that successfully executing a sale to a competitor in such a situation would be no easy matter:  bringing key employees into his confidence at the relevant time would run the risk of upsetting them and leave the owner very vulnerable.

THE ALTERNATIVES

We were able to provide guidance on an alternative to a trade sale:  the potential to develop the management team (and in particular a key employee) with a view to them undertaking a vendor-funded management buy-out in three years’ time.

This allowed the owner to continue to be involved in his business for the foreseeable future, whilst nurturing his team and the business knowing that it will continueafter his retirement in safe hands.  Better still the owner could hold a significant shareholding after the MBO and continue to share in the future growth.  If everyone agreed the MBO could simply be a stepping stone to a future sale at a much higher value in 10 or 15 years.

Structured as a vendor-funded MBO this will be a simple and very effective route for the owner to plan for his retirement.  His team, through a new company formed for that purpose, would buy the remaining shares on deferred payment terms.  The team will effectively buy the business out of its future cash flow.  The owner pays 10% tax with entrepreneur’s relief.

Importantly, the owner still has the ability to sell the business through a trade sale as the fall back option if the MBO proves not to be possible.

SHARE CAPITAL AND VESTING OF OPTIONS OVER TIME

We designed an employee share scheme as part of the planning for the owner’s retirement. The scheme itself was an Enterprise Management Incentive scheme (an EMI scheme) which is a tax‑advantaged scheme.

The options were designed to vest (meaning the employee can acquire the shares) over time based on increases in the profits of the business.

The design included a re-basing using preference shares to enable low cost EMI options to be awarded.  Having employees become shareholders can be problematic.  Their participation in dividends may not be what you want.  Here the coupon on the preference shares (effectively the interest rate) meant that the owner was entitled to a “preferred dividend” so any employee dividends would be modest and not upset the existing remuneration arrangements.

COMMUNICATION WITH THE TEAM

An employee share option scheme that is not understood will not be motivational.  We have helped the owner communicate the scheme so that he was sure that everyone understood what was involved and what it meant for him, the team and the business going forward.

MANAGING THE PROCESS

We handled all aspects of the design and implementation of the scheme.  This included guiding the owner on the principles of valuation and agreeing that value with HMRC, as well as on key tax issues for him and his team.  We assisted with an introduction to and briefing of a personal tax planning and Will writer solicitor.

 DEVELOPING THE MANAGEMENT TEAM

An introduction was also made to an associate adviser who is providing detailed financial modelling and coaching to develop the management team.

UNLEASHING ENTREPRENEURIAL SPIRIT

 Six months on from the introduction of the scheme things are going well.  The owner is happy that he has a clear plan to his retirement and a newly engaged and motivated team.

The share option scheme has unleashed everyone’s entrepreneurial spirit.  With opportunities overseas the whole team is up for the post Brexit challenge.

Everyone is going to be a winner!