Owner managers with successful businesses who are approaching retirement are faced with a number of options. One is to sell the business to a third party buyer. However, in some situations, the owner may prefer to give the management team the chance to acquire the business. This may be the case where a number of the following factors apply:
- the owner wants to retain an interest;
- management have helped grow the business and are at a stage where they are ready to take the helm;
- the owner does not want to conduct a sales process and alert customers and competitors to the fact that the business is on the market;
- it is not a business where there are natural third party buyers;
- the owner is prepared to take his consideration over a number of years.
Where these factors do apply, there is a process with the strange acronym of a VIMBO, which stands for a Vendor Initiated Management Buy Out, which can meet the goals of the owner and manager.
In a VIMBO, the management team sets up a new company which buys the existing company. The owner is effectively paid out of retained cash in the business and from the profits of the company over the next few years. However, as the money is being paid for the sale of the shares rather than being paid as a dividend, the owner may be able to benefit from Entrepreneurs Relief and pay only 10% tax.
The reasons for using this route are:
- the owner can realise the value of his business;
- there is no need to find a third party purchaser;
- it is tax efficient for the owner and company;
- it incentivises managers;
- it allows the owner to retain an interest and control;
- it devolves ownership to managers.