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Selling a business can be a difficult process at the best of times. In this current period of economic downturn, though, it can be even harder to secure bountiful interest in the purchase of an existing business. However, there is one solution that can help business owners avoid the difficulties of public tender: the management buy-out.
What is a Management Buy-Out?
In essence, a management buy-out is a situation whereby an existing executive or management team within a company collectively tenders an offer for the ownership of the said company. A management buy-out could come about in a number of ways; a team might catch wind of their company’s owner’s intent to sell, and pre-emptively come forward with an offer. Alternatively, they may put in an offer when the business is put forward for public tender.
From the management team’s point of view, buying out their company represents a unique business opportunity wherein they can apply their industry knowledge and direct company experience in shaping the direction of the business they helped to build. However, a management buy-out can also present unique challenges, not in the least in the form of funding, finances, and – crucially – tax implications.
The Tax Consequences of an MBO
The tax implications of an MBO fall to the structure of said MBO. The management team may be offered the opportunity to buy shares in their company, or alternatively to buy assets outright. If the team chooses to buy shares, the business owner will be liable for capital gains tax, while asset sales may be subject to corporation tax.
If the seller is selling their business entirely, asset purchases are preferable; taxation only occurs on one level, as opposed to the two tiers of taxation from the purchase of a company’s shares, and the subsequent release of that value from the business. With regard to the purchase of physical premises, stamp duty is another tax liability to consider.
Funding an MBO
Funding is the wider issue for any prospective buy-out team and is often a major factor in business owners’ decisions regarding MBOs. It is a simple fact that other business owners or venture capitalists will have more liquid assets than a team of salaried executives; selling to another company can be simpler for the business owner.
However, this is not to say that a management team cannot pull together the funding and resources to purchase the business. For many business owners, selling to their internal team is preferable by virtue of keeping company information confidential, and leaving their work in good hands. Such funding may come via private investors, or by personal asset financing solutions such as secured loans.
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