Can you have your cake and eat it?

What are the options for business owners realising the value of their business through a sale to management? Trade acquisition activity has fallen over the past few years due partly to the lack of bank finance but also the appetite of businesses looking to buy a competitor. Often an acquiring business is now too financially stretched themselves to think about buying a business. As such if you are beginning to think about succession or indeed looking to plan an exit, then the options can appear somewhat limited, unless you consider a sale to the management. Through a supported management buy out, otherwise known as an MBO, the owner of a business can affect the transfer and crystallise the value of the business for advantageous tax benefits under Entrepreneurs relief. This can also apply to the cash held in the business and help save tax on a capital gain. The advantages of this method are many fold, namely: •    You know who you are selling to and this will help protect your staff ongoing employment, •    It can avoid painful negotiation with a competitor, who will want you to disclose sensitive information. •    Bank funding is minimised and therefore the process more likely to succeed. •    The process is usually quicker than a trade sale. There are potential downsides however, these being: •    There maybe a lack of entrepreneurial flair or management ability to take over control •    Available equity from management is often limited and funding may not be readily available In an attempt to address these concerns Investing Directors, who are experienced business people with their own private capital, are more frequently looking to lead and assist a MBO. The introduction of such an investor, otherwise known as a management buy in or MBI, will also help introduce executive skills into the business that may be lost if the owner was to step down or exit. They are therefore keen to speak with businesses owners who want to sell part or most of their shareholding, but who may want to stay involved either operationally or financially depending on the view of the owner. As regards raising the funding for such a  project then another option is to support the management team with your own money, commonly known as a ‘vendor loan’. In this way you leave a portion of the purchase price invested in the business as equity or as a loan which is then paid back from future profits. The is commonly known as a Vendor assisted MBO. The key benefits from this approach are: •    The terms of the deal mean that the vendor is protected if the new management are unable to meet the loan note commitments. •    The vendor effectively retains control until fully paid thus reducing the risk to the vendor in the business or deal failing •    You remove the need to negotiate with VC’s etc. •    The method enables a phased and sensible transfer of goodwill, and transfer risks are mitigated. •    The purchase price or consideration would usually be at a premium •    Minimal impact on the business compared to a third party and the management team are not distracted from running the day to day operations. •    Vendors don’t need to give onerous warranties or indemnities. The choice of options are usually driven by your needs, which can be the amount of cash you wish to receive initially, the consideration or purchase price you are expecting, and also the level of your involvement going forward with the business. It may be that you wish to stay involved on a part time basis with an agreed period of steady withdrawal of your involvement. At The MGroup Corporate Finance LLP we are experienced in assisting business owners in the plan to exit through these routes so please give me a call. Mark Crossfield, Corporate Finance Partner, The M Group Corporate Finance LLP 07780 957631 or m.crossfield@theMgroup.co.uk