Yorkshire and North East Dealmakers Guide 2016 - 4

4 GROWING YOUR BUSINESS Selling a business to the management A sale to management can provide a number of advantages for both the owner and the management team itself. We look at the process and benefits MBOs FUNDING While the management team will be required to invest some personal money, in return for an equity stake in the 'new' business, the majority of the deal will be funded by banks, private equity firms or venture capital houses. The management team will probably speak to the company's existing bank to see if it will support the MBO, which it may well do. It does, after all, know the company's financial history, client base and management profile. Private equity providers will invest ©shutterstock.com A management buyout (MBO) is the purchase of a company by its management team. The team will personally invest in the business or take a significant equity stake. The remaining funds are usually provided by external parties (typically a private equity firm and/or a bank) as a combination of debt and equity. In the first few years, the cash flows are typically applied to servicing and repaying the debt taken on as part of the transaction. Over time, the management team has the opportunity to increase shareholder value by paying down the debt and increasing the underlying profitability. The owner must first establish that there is an interest in, and an appetite for, an MBO. They will need to consider not only the financial implications personally but how the buyout will affect them professionally and reputationally. with a view to 'exit' the company after an agreed period (typically five years) and will make sure turnover and profitability increases at the required rate. DEFERRED CONSIDERATION relief, which reduces this to 10 per cent, although this may not be possible if they retain an interest in the company. The management team will have tax issues relating to the shares they acquire and future income tax implications to consider. The business owner who is selling will prefer the sum of money agreed in full. Where this is not possible, a 'deferred consideration' will be required, where a proportion of the amount is agreed so that the MBO can proceed. All parties need to be satisfied that the deal is right. It is therefore essential for external financial and legal due diligence to be carried out. EARN-OUTS ADVICE Another option is for the owner to receive additional payments based on the future trading performance of the company, at agreed milestones. Good professional advice is required at every stage of the process. Ensuring the MBO is viable at the earliest stage can save time, money and goodwill. The corporate finance adviser will be able to provide an independent view on whether the valuation is correct and can assess the viability and validity of all the financial and commercial terms. TAX FACTORS The selling owner will want to pay the minimum amount of capital gains tax. They may be entitled to entrepreneurs' DUE DILIGENCE http://www.shutterstock.com

Table of Contents for the Digital Edition of Yorkshire and North East Dealmakers Guide 2016