Context & Dilemma
The Managing Director had set up a UK subsidiary from scratch, building it into a profitable business through a team of 8 people. In recognition of this good work, the current business owner was attempting to ‘give’ a significant shareholding in a UK trading company, a subsidiary of his European based group. However, their tax accountant advised them that this share gift would trigger an income tax bill of between £200k and £300k under employment related securities anti avoidance legislation.
Our VFD advised the Managing Director, who confirmed that she was interested in acquiring a controlling shareholding, so negotiations commenced for a Management Buyout. The Managing Director had built the UK trading company from start up, and so she only wished to commit an earned bonus to cover deal fees. Our VFD helped to negotiate a vendor funded buyout, whereby shares were purchased in exchange for a vendor loan, repaid over a period of years, so that the future cash flow of the business funded the deal.
Negotiation focussed on Group trading arrangements and the benefit of remaining part of the group for mutual benefit. Once we achieved a negotiated solution our VFD drafted the heads of terms agreement, obtaining sign off by both parties. Our VFD then scoped out the project work for obtaining tax clearance and Corporate law work, drawing up a deal budget. The tax clearance and corporate law work was tendered, and providers selected and engaged.
However, the negotiations floundered over who would have the option to sell the business in the future. The Managing Director wanted control over the final business sale process in order that her shares would have genuine value. The 11th hour hitch was the owner engaging his own corporate lawyer, ensuring a rewind of the negotiation, and bringing in an additional stakeholder from within the group. One crucial weekend the deal was close to collapse but, after giving further thought and regard to loyalty to the team she had built over the preceding 8 years, the Managing Director came back to the table.
The Corporate Lawyer did a good job at bringing the deal back together, negotiating business exit options for each party, conditional on achieving minimum valuations. The Managing Director set a deadline for the deal, due to the timing of a presentation of a prestigious award. The deal was then completed with both parties feeling a good deal was struck.
Our VFD then utilised the Tax Clearance to create an EMI Share Options scheme that would allow the Managing Director to incentivise her team. The business is now under new leadership and has a great opportunity to generate significant growth, yielding value to both the Managing Director and the European based part owner. This was all achieved with no tax cost, with deal fees which were a small fraction of the potential tax liabilities.
My negotiations with the European business owner were becoming very protracted and a large unwanted tax liability was the final straw. Our VFD opened up a different buyout route which held out the possibility of taking back control of the business I had built. The negotiations had many twists and our VFD worked well with the Corporate Lawyers who also significantly helped achieve a successful deal. I am really pleased to be in control of the business I built up, with the ability to motivate my team though EMI Share Options, and I look forward to the business flourishing over the coming years. Thank you for all your support throughout the whole MBO process. I have been very impressed by your knowledge and professionalism and appreciated the way you managed to move the process forwards during some difficult times.
CP – MD and part Business Owner