Home > Projects > Business Tax > A Management Buyout

The Problem

The client (Mr K) was the majority shareholder of a trading company (TradeCo). Mr K wanted to sell most of his shares in the company to 3 key members of the management team, who had minor shareholdings in the company, and part retire from the business. The problem was that the management team did not have the personal funds to acquire the shares from Mr K for what they were worth, nor the ability to borrow such funds.

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The Solution

The solution was to implement a management buyout via a New Company (NewCo). NewCo was incorporated by the management team. The company then agreed to acquire the whole shareholding of TradeCo, in consideration for:

The issue of the new shares in NewCo to the 3 members of the management team, in the same number and class of their former shares in TradeCo.

The payment of Cash and Loan Notes to Mr K for the shares he wished to sell.

Cash was passed up tax neutrally from TradeCo to NewCo to pay Mr K the cash due on completion. The loan notes were paid down in the same way over a defined period, from the post-tax profits of TradeCo.

The Result

In summary:

  • Mr K received a fair value for his shares, paying capital gains tax on the disposal, and potentially qualifying for business asset disposal relief.
  • The management team increased their respective interests in the trading group, without any tax charge.
  • The buyout was funded the profits of TradeCo (passed up to NewCo), which has 2 benefits:
  1. It is more practically affordable, as the management team did not have the capital to fund the buyout, and;
  2. It is more tax effective than the management team acquiring the shares using their own post tax income/capital, if such funds were available.