The current economic landscape is a difficult one to navigate; growing challenges may be the perfect catalyst for business owners to sell their stake and retire, or start afresh in a less volatile industry.
Management buy outs are an increasingly popular form of business sale, providing business owners with the opportunity to guarantee a quick sale alongside the continued operation of their company in a diligent manner.
But management buy outs bring with them numerous considerations – including those relating to tax.
What is a Management Buy Out?
A management buy out is a form of business acquisition, where a business’ existing management team collaborate to buy a controlling stake of the business’ equity. Depending on the nature of the individual deal struck, they may also take on the physical assets of the business and any debt owned by the business.
This form of buy out can be beneficial for both the seller and the business; the buy out provides a relatively swift route to sale, and ensures the business is left in capable hands invested in the company’s continued success. It also enables management teams to make productive changes that protect existing staff.
The Tax Consequences of a Management Buy Out
Any business sale has tax implications. For the uninitiated, whether inexperienced management teams or outside observers, the potential tax consequences for undertaking a management buy out may be misconstrued as complex and costly.
However, tax obligations from business acquisitions may in fact be beneficial to management teams – depending on the route to purchase they take.
For example, there are Stamp Duty obligations on the purchase of both shares and assets – but Stamp Duty is lower on shares than on assets. As such, the purchasing of shares can result in a tax saving overall. Capital Gains Tax is another consideration, and one that can be managed through a specific form of asset-based ownership strategy.
Outgoing shareholders sell their shares to the company itself, as opposed to the incoming ownership team, reducing the tax cost overall.
There are also opportunities for tax relief in the medium term, especially where intellectual assets and financial losses can be offset against tax costs.
Funding a Management Buy Out
A management buy out team is typically formed of salaried staff members within the business – hence, staff members that do not have a significant degree of capital to invest, even collectively. As such, financing becomes a necessary aspect of the vast majority of management buy outs.
There are numerous avenues via which a buy out team can fund the purchase of their business.
Major lending institutions can provide an asset-backed business loan, the interest on which may be tax-deductible if treated correctly. Alternatively, venture capitalists could get involved as external seed-funders, with the incentive of growth improving the stature of their own holdings over time.