One of the more popular arrangements now being implemented by Vantis for successful business clients is a VIMBO – which stands for Vendor Initiated Management Buy-Out. To understand how a VIMBO works, let’s consider the case of a successful entrepreneur whom we met recently at a networking event.
This prospective new client (let’s call him Siralan) had built up a company (let’s call it Sugarco) that he believed was worth £5m and which he would sell for £5m. However, he was not confident that he could easily find a third party buyer prepared to pay that amount. In any event, if he took steps to try to find a buyer it would be very difficult to prevent customers, suppliers and staff from finding out – which he was concerned would have an adverse impact on the business. In addition, he was worried that he would be forced to focus on the process of identifying and progressing negotiations with potential buyers instead of concentrating on the business. As if this were not enough, Sugarco’s two key employees (let’s call them Margaret and Nick) both of whom had been apprentices with him and were now directors of the company, were getting restless and needed an incentive to stay with him.
Siralan would willingly sell out for £5m and very much liked the idea of banking his winnings to date. Furthermore, he felt he needed some kind of change of direction in life, even though he was far from a spent force and he knew Sugarco’s business and the sector inside out.
Our recommendation was that he should spend a year or so grooming Margaret and Nick for a partial management buy-out. We suggested that, when he thought that they were ready, they should form a jointly-owned company (let’s call it Vimbo) which would make an offer to buy Sugarco for £5m. Margaret and Nick would each have, say, 25,000 £1 shares in the VIMBO and the offer to Siralan would be £2m in cash, a £3m loan note and the issue to him of 25,000 £1 shares in Vimbo – a one-third holding each.
Sugarco had about £500,000 of free cash and its bankers, Amsbank, said they would be willing to lend Vimbo £1.5m cash and had no objection to the issue of a £3m loan note – provided it was subordinated to their debt. Amsbank said they would want a financial commitment by Margaret and Nick and were happy with the proposed £25,000 subscription by each of them for shares in Vimbo. The bank also took comfort from the fact that Siralan would continue to be involved in the business. In fact, he was looking forward to taking on a new role of identifying acquisition targets for Sugarco, leaving Margaret and Nick to manage the business and pursue organic growth.
With careful planning, this strategy could be implemented with no adverse tax consequences. Siralan would pay Capital Gains Tax (CGT) of about £280,000 on the £2m cash received, and that tax would be payable on 31 January following the tax year in which the deal takes place. On a partial or total redemption of the loan note Siralan would pay CGT at 18% on the amount of gain made by him. Depending on the nature of the loan note the gain might either be calculated by reference to the face value of the loan note and the original cost price of his shares in Sugarco (they cost him a nominal £100) or by reference to the amount of cash received by him on redemption – it depends on whether the loan note is regarded as a qualifying corporate bond or as a non-qualifying corporate bond. On a sale of his shares in Vimbo, which would be treated as having cost him less than £100, Siralan would pay CGT at 18% on a gain made.
When Siralan discussed this with Margaret and Nick they were very enthusiastic and at the first board meeting after the discussion they were brimming with new ideas. When Siralan asked why they hadn’t put these ideas forward at earlier board meetings they explained that they hadn’t spent all their time thinking about the business until they knew they were going to have a stake in it!
And what of our attempts to win this prospect that we met at the networking event? Siralan asked his secretary Frances to send in his existing accountants…and then told them “You’re Fired!”
As featured in En Passant Magazine - June 2008.
To learn more about Exit Strategies or a Vendor Initiated Management Buy-Out, please contact Jonathan Perrin or enter your details and submit the online form below.