Management Buyout (MBO) & Vendor Initiated Buyout (VIMBO)

A Management Buyout and Vendor Initiated Management Buyout are forms of succession planning allowing current shareholders to pass over the business to key members of the company’s management team.

They are typically used in owner managed business where one of the company’s founders would like to reduce their involvement, either entirely or partially. The rationale behind reduced involvement is typically part of a retirement plan.

Management Buyout (MBO) & Vendor Initiated Buyout (VIMBO)

What is it?

A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business from the company’s current shareholders. Typically, in a management buyout, it is the management team that ask the owner if they can buy the business. Whereas a vendor-initiated management buyout (VIMBO) is a type of management buyout where the owner offers the business to the management team.

With management buyouts, the management teams often need help pulling together a buyout proposal and approaching the owner. With a VIMBO, the vendor puts together a sensible and well-structured deal before approaching the management team. This can take the pressure off the management team to produce an acceptable offer for the departing shareholders. It also lets the current shareholders take control of the process.

Why do it?

VIMBOs & MBOs are often utilised by retiring or ageing business owners as a way to pass their company down to the next generation. Typically, VIMBOs and MBOs are used by shareholders who would prefer ownership of their company which they have usually founded and operated to transfer to the company’s current management rather than an external third party. MBOs and VIMBOs allow the management team of a company to take ownership of the company without the need to pay for the company personally, as the consideration received by departing shareholders usually comes from the company’s profits.

The departing shareholders can usually take advantage of business asset disposal relief should they meet the criteria and receive clearance from HMRC reducing the capital gains tax rate to 10%. This not only makes a VIMBO a tax-efficient way of disposing of a company which is no longer required, but also allows for a smooth transition process between the current and incoming owner.

It is also common for the owner to keep a minority stake (perhaps as much as 25%) in the business and regularly act as a consultant to the business after the buyout, allowing them to gradually wind down their involvement. This usually makes the change of ownership easier for everyone concerned.

Owners and management teams usually find a VIMBO more attractive than selling the business to a third party as the takeover is completed by senior management who know how the business operates on a day-to-day basis.

Future Sale or IPO

The completion of a MBO or VIMBO does not hinder the company’s ability to be sold to a third party in the future, nor does it prevent an initial public offering or other float event.

How can Hamilton Blake help?

We can help with structuring the terms of a restructure, preparing the documentation, agreeing clearance with HMRC, and taking you through the process of completing a management buyout or vendor-initiated management buyout.

Completing either a MBO or VIMBO with Hamilton Blake can usually be split into the following steps:

  1. Initial Call – We would seek to arrange an initial call with you to further explain the ways to structure a MBO or VIMBO and answer any initial questions you have and also learn about you so we can advise on which route will be most beneficial for you and your company.
  2. Initial Report – After the initial call we would produce a detailed note on the potential routes that would be available to your company, whether that be a VIMBO or something else such as a purchase of own shares. This note would outline the different options and the tax implications for each: the company, the departing shareholders, and the management team.
  3. Follow up call – We would then seek to arrange a follow up call to go through any further queries you have once we have collectively decided on the optimal route for your company we would then liaise with the appropriate corporate lawyers to discuss the legal aspects of the restructure.
  4. Final Report – Hamilton Blake would then produce a final report outlining the steps we intend to take and the tax implications of each stage.
  5. Drafting of clearance application – Upon a final review of the final report, we would then draft a clearance application to HMRC which will outline the steps we intend to take and the tax implications of each stage.
  6. Liaising with HMRC and corporate lawyers – HMRC will then either agree or disagree with our tax implications of each stage or request further information. Once we receive clearance from HMRC, we will liaise with the appropriate corporate lawyers to draft all the necessary documentation.
  7. Implementation – Once all the legal documentation has been drafted we would then be in position to implement the restructure and complete the MBO/VIMBO.

Should you have any queries about the process or whether a MBO or VIMBO may the right route for you and your company then please do not hesitate to contact us.