A vendor-funded (or “owner-funded”) management buy out can be a great solution for business owners who want certainty when it comes to the sale of their company. You can decide when you sell, you’ll trust the buyer(s) and are far more likely to get the price you want and need.
But a VF-MBO isn’t without risk. So what should you be thinking about?
- Up to the challenge?
With the right team in place to take the business forward you will, of course, lower the risk of not being paid your consideration. You may, though, need to consider the skill set and resilience of your current team and make sure that there are no “gaps” that should be filled to give them the best chance of success. Independent advice on this can be crucial as you may well view the great team that you have built over time through rose tinted glasses.
With a VF-MBO you will be paid out over a period of time but any surplus cash reserves that you have built up that are not required for working capital can be paid out to you on completion of the sale of the business to your team. This cash would only attract tax at 10% with entrepreneur’s relief. The problem is that many businesses do not have great sums of cash. It might be that you ask the team to put in a sum at completion so that you get more upfront but they may themselves not have the cash available.
- What if I don’t get paid?
Whilst your team (and you) may be sure that they will be able to pay you the full amount of the consideration without a hitch you will need to be clear as to what happens if, for example, they lose a key customer through no fault of their own which means cash is particularly tight for a period of time. You may not necessarily want to jump back in but legal security will protect you “just in case”.
The best form of security is often a legal charge over the team’s shares. This means that if they default you could “step back in” and take control. The team will still have the “beneficial ownership” of the shares but you could exercise all relevant voting powers in order to do as you see fit to get things back on track. This is often preferable to a debenture as an administration could cause damage to the company’s reputation.
- A balanced equity split
People often surprise us and with that in mind it is often advisable to ensure that the split of the shares between the management team is well balanced so that there is a balance of power between the team and one does not have overall control.
- Your involvement post the deal
You could retain a residual shareholding yourself so that not only do you get a potential future return (in exchange for the risk that comes with deferred consideration), but you will also be entitled to see everything that a shareholder would usually expect to see. You could also have some minority protection in place such as a list of matters that cannot be undertaken without your consent.
You will think it wise to remain on the board of directors during the payment period so that you can keep an eye on what is going on and give invaluable guidance and support to your team as they learn what it means to be a business owner.
Yes there are risks involved. But if you consider the above 5 points carefully before proceeding down the path of a vendor-funded management buyout you can give yourself, your team and your business the best chance of long-term success.
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