Chartered Accountants
What Is A Vendor-Initiated Management Buyout?
If you are considering exiting your business you should consider whether a vendor-initiated management buyout (VIMBO) can allow you to realise the value from your family or owner-managed business before you retire.
A VIMBO also gives you control over the succession plans for the business as you could remain as a director (potentially remaining as the Managing Director) until you have been paid in full.
How does a VIMBO work?
A VIMBO is very similar to any other Management Buy Out (MBO) but with one important difference – it is you that would initiate the process and make an approach to management, or the next generation of the family (the Buyout team).
Commercial benefits
Typically, a VIMBO would be structured so that you could extract excess cash on the balance sheet on completion, together with deferred consideration that would be paid to you out of the future profits of the company.
As the buyout is usually funded primarily out of future profits of the company, the family Buyout team does not have to make any substantial personal investment.
From a cash flow point of view, your future extractions could continue at the same level as your dividends so that the business is cash-neutral; it is simply that your withdrawals are treated more tax favourably.
Your tax position
Typically, if you are the majority shareholder in a family or owner-managed trading company, you should be eligible for the 10% rate of capital gains tax by claiming Business Asset Disposal Relief (previously Entrepreneurs’ Relief), which currently applies a 10% rate of Capital Gains Tax up to a lifetime limit of £1m with any excess being taxed at the rate of 20%.
However, as you would be receiving your drawings as deferred consideration for your shares, rather than by declaring dividends, the rate of tax payable on your drawings could be reduced significantly in the final years before your retirement.
Buyout team
From a commercial point of view, the key advantage of a VIMBO for the Buyout team is that they are only required to make a small personal investment, and you would be repaid wholly out of the future profits from the company.
An added advantage is that the Buyout team could potentially receive a salary for their statutory duties as a director and receive the balance of their income by way of dividends.
A salary of £50,000 would cost the company £45,485 including employer NICs but after deduction of corporation tax savings. By drawing part of their income by way of dividend, the Buyout team would significantly increase their net income at no additional cost to the company, as shown in the table below:
| Salary | Salary and dividend | |
|---|---|---|
| Salary Dividend | £50,000 - | £9,100 £38,114 |
| Total income Tax and NICs | £50,000 (£14,022) | £47,214 (£2,856) |
| Net income | £35,978 | £44,358 |
| Cost to the company | £45,485 | £45,485 |
For a Scottish taxpayer on a salary of £50,000, this would represent an increase in net income of around £700 per month at no additional cost to the company based on 2022/23 tax rates.
Conclusion
There is no doubt about it, at the moment any retiring business owner may find it difficult to find a buyer for their business, let alone one that will pay market value in the current economic environment. Indeed, many business owners may not even consider it possible to sell their business right now or for the foreseeable future. In such cases, a VIMBO can be very effective from a commercial and tax point of view.
One of the features of a VIMBO is that there is no ‘one size fits all’ model – every company is different, particularly if there are family relationships interposed. A VIMBO can be very effective in the right circumstances. If you would like to talk to us more about your business exit plans, please get in touch with our EQ Taxperts by emailing [email protected] or call one of our offices.
