You may have noticed we think the VF-MBO is a great way for owner-managers to unleash the entrepreneurial spirit of their team whilst ensuring an exit in a tax-efficient way on terms acceptable both the owner and the team.

This blog looks at a client who we helped to do just that.

Background

The founder had started the business 20 years before but had now been diagnosed with a health problem.  He wanted to semi-retire but continue to be involved in the business (as many owner-managers do!).

He had a great management team of 3 as well as a non-executive director. There were 12 other loyal employees many of whom had been with the business for over 10 years.

The Challenge

This was a small company with a close team of long-term employees. The founder had personal relationships with everyone going back many years and he was concerned that a trade sale would be very difficult to achieve. The team were vital to the continued success of the business and the concern was that a third party buyer would not appreciate this in the right way. The team may well have been nervous that their jobs would not be secure with a new owner.

So, a sale to the team made a lot of sense for everyone BUT….

Price

The most contentious point of any negotiation you may think.

The management team had no savings, high personal borrowings and were risk averse. Impossible then to do a deal?

The company was turning over around £1.5m with £300k pre-tax profit (and had £350k of surplus cash). On the basis of a 5 x multiple of post-tax profits the valuation was agreed at £1.25m.

Terms were proposed that allowed the founder to retain a 25% equity stake in the business which satisfied his wish to stay involved in the future. The team would pay the surplus cash out to him at completion of the deal and the balance would be paid out of the future profits of the company. Basing the valuation on a multiple of the post-tax profits worked commercially for everyone involved as well as for the business and its cash flow requirements as they should make the money due every year if they remain on plan.

The Legal Bit

With a deal that worked for the founder, the team, and the business, the team chose not to take independent legal advice and were guided by the non-executive director.

The managers gave a guarantee to the founder that the cash to be paid out over the 10 year term would be paid by the new company and this was secured by a legal charge over their shares.  This charge meant that the guarantee was limited to, and to be satisfied by, their shareholdings so that the founder could take legal control of the shares if the team were in defaults but that their personal assets were not as risk.

The Tax Bit

Tax clearances were needed for the buy-out structure (as is usually the case) and this ensured that the founder’s tax liability was limited to 10% with entrepreneur’s relief.

Nice and simple!

10 Years On?

The full £1.25m has now been paid. But that’s not all. The story has a further happy ending in that the health of the founder has improved and he is now more actively involved in the business than might have been expected!

For further information please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com