MBO / equity share advice
Discussion
Long time member of PH but id prefer anonymity given then nature of the post.
Looking for a bit of advice regarding a possible MBO, or the mechanics around creating a structure that has a more equitable split of control and equity in a small to medium sized service business.
Out of the 2 original cofounders, 1 remains with 95% of the business and the recently departed cofounder still holds 5% (1 of the reasons for leaving). The current owner and sole director has no day to day input and the business is now run by a management team which is formed of senior members from each of the core elements of the business.
Prior to the management team structure, the business usually made significant losses and had major cashflow and organisational issues. Things are now healthy, albeit success hinges on a few key individuals and the owner not doing anything silly that is currently outwith our control.
The owner admits they cant run the business without the management team and wouldn’t have a clue how to replace us as he is too far removed from the day to day and has been carried by the other cofounder for years.
For arguments sake, the business is valued by HMRC at £500k and there are currently 500,000 shares of which the current owner has 475,000.
Looking at the options available to us in terms of total buy outs, dilutions or hostile, it seems like a total minefield in terms of raising required capital as well as the immediate tax implications once anything goes through HMRC / companies house for anything other than a start-up?
MBO – we could raise £500k immediately and another £500k via future profits which might tempt the owner but new directors would be liable for pretty hefty tax bills when new shares were issued?
Dilution – diluting the 95% down to 30% wouldn’t be tax efficient and it would need to be more like 10% to qualify for ER which any advisor is clearly going to advise against.
Hostile – prepack admin and other morally iffy tactics I’d like to avoid but might be considered if things get nasty, which could happen…
Next step is to go an take some professional advice but thought I’d ask the PH collective before the legals come back to work from the Christmas break!
Looking for a bit of advice regarding a possible MBO, or the mechanics around creating a structure that has a more equitable split of control and equity in a small to medium sized service business.
Out of the 2 original cofounders, 1 remains with 95% of the business and the recently departed cofounder still holds 5% (1 of the reasons for leaving). The current owner and sole director has no day to day input and the business is now run by a management team which is formed of senior members from each of the core elements of the business.
Prior to the management team structure, the business usually made significant losses and had major cashflow and organisational issues. Things are now healthy, albeit success hinges on a few key individuals and the owner not doing anything silly that is currently outwith our control.
The owner admits they cant run the business without the management team and wouldn’t have a clue how to replace us as he is too far removed from the day to day and has been carried by the other cofounder for years.
For arguments sake, the business is valued by HMRC at £500k and there are currently 500,000 shares of which the current owner has 475,000.
Looking at the options available to us in terms of total buy outs, dilutions or hostile, it seems like a total minefield in terms of raising required capital as well as the immediate tax implications once anything goes through HMRC / companies house for anything other than a start-up?
MBO – we could raise £500k immediately and another £500k via future profits which might tempt the owner but new directors would be liable for pretty hefty tax bills when new shares were issued?
Dilution – diluting the 95% down to 30% wouldn’t be tax efficient and it would need to be more like 10% to qualify for ER which any advisor is clearly going to advise against.
Hostile – prepack admin and other morally iffy tactics I’d like to avoid but might be considered if things get nasty, which could happen…
Next step is to go an take some professional advice but thought I’d ask the PH collective before the legals come back to work from the Christmas break!
First step will no doubt be agreeing a valuation of the business with the current owner and between the buyers. Once you have that, then you can look at funding options. If without you guys he can't run the business, you're obviously in a very strong position to negotiate.
The easiest funding solution is for the new directors to buy the shares from the existing share holder, which will most likely involve personal loans and mortgages (or even second mortgages) being taken out. It is unlikely you will be able to secure any borrowing on the goodwill of the business itself (in my experience). Depending on the size of the business (will realistically need to be £5m+ t/o, £1m+ EBITDA), there may be PE backers who you can talk to who will fund the deal in exchange for shares, difficult there is they're looking for an exit at some point so you should have plans in place to return them their cash + profit, either through an IPO or through making yourself attractive enough for acquisition by a competitor or similar.
Finally, you may come up against an issue of how to allocate the shares between the upper management team. That will always be an interesting discussion but one that you need to have openly and frankly as early as possible during the process.
The easiest funding solution is for the new directors to buy the shares from the existing share holder, which will most likely involve personal loans and mortgages (or even second mortgages) being taken out. It is unlikely you will be able to secure any borrowing on the goodwill of the business itself (in my experience). Depending on the size of the business (will realistically need to be £5m+ t/o, £1m+ EBITDA), there may be PE backers who you can talk to who will fund the deal in exchange for shares, difficult there is they're looking for an exit at some point so you should have plans in place to return them their cash + profit, either through an IPO or through making yourself attractive enough for acquisition by a competitor or similar.
Finally, you may come up against an issue of how to allocate the shares between the upper management team. That will always be an interesting discussion but one that you need to have openly and frankly as early as possible during the process.
OP if you'd like some offline advice then PM me.
My current role, after I bought and sold a number of my own businesses, is working on buy and sell mandates on behalf of clients- very much corporate finance and M&A. You've got a fair few options in funding and otherwise but its a really exceptionally bad idea to do anything hostile- it only ends in tears.
LBOs have a number of funding routes currently, but it really depends on the size of the business, the make up of the balance sheet, the growth of the business and the sector you are in.
Not really a conversation for online from my perspective.
My current role, after I bought and sold a number of my own businesses, is working on buy and sell mandates on behalf of clients- very much corporate finance and M&A. You've got a fair few options in funding and otherwise but its a really exceptionally bad idea to do anything hostile- it only ends in tears.
LBOs have a number of funding routes currently, but it really depends on the size of the business, the make up of the balance sheet, the growth of the business and the sector you are in.
Not really a conversation for online from my perspective.
Gassing Station | Business | Top of Page | What's New | My Stuff