Pursuing a management buyout (MBO) is a great way to lead a business you are familiar with. It provides a means to foster growth or help to revive a struggling business by assuming risk.
Nevertheless, buying a business via an MBO requires careful consideration of the financing method and how to structure the purchase.
Our experts have outlined the most common financing options and the tax considerations that accompany them:
Debt financing
Opting for debt financing involves securing a loan to fund the MBO.
This can lead to tax savings, as interest payments on the debt are generally deductible from profits, reducing the business’s Corporation Tax.
It’s important to enhance your cash flow management to accommodate the cost of borrowing.
Accurate financial forecasting is essential to ensure timely repayment of the loan.
Acquiring shares
For businesses with assets of £30 million or less, acquiring shares from the business can be a tax-efficient option, due to Enterprise Management Incentives (EMIs).
This scheme allows management teams to acquire shares worth up to £250,000 over 3 years, with significant tax savings.
If the shares are sold to you at least the market value, no Income Tax of National Insurance will be due. In the case a discount was offered, tax will be due on the difference between the market value and the discount.
Pension funds
Funding an MBO through pensions, particularly Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs), can help to structure an MBO tax-efficiently.
These pension schemes can invest in a variety of assets, including shares of private companies, which can be instrumental in an MBO scenario.
This not only provides funding for the buyout but also offers significant tax benefits, as contributions are typically deductible and investment growth within the pension is largely tax-free.
External investment
Seeking funding from external investors is another common option for MBOs.
It’s crucial to communicate the tax implications and potential tax reliefs available to investors clearly, as this will have a large impact on their willingness to invest.
Various tax relief schemes may apply, such as the Enterprise Investment Scheme (EIS) which can offer tax reliefs for individual investors on shares worth up to £5 million each year or £12 million in the business’s lifetime.
Understanding these reliefs can bolster your proposal, increasing the attractiveness of investing.
Given the complexity of MBOs, getting professional advice on the tax implications of the sale is essential.
If you’re considering pursuing an MBO, contact our team for advice.