A VIMBO – or Vendor-Initiated Management Buy-Out to give it its full title – can be an effective way for a business owner to realise some value from their business and put a robust succession plan in place. We advised a client through this process recently, and their situation gives a good example of why, in the right circumstances, this approach can work well for all parties. The owners of the business in question were already receiving wealth management advice from Progeny and when they explained their corporate circumstances we were delighted to assist them in this next stage of their commercial journey too.
The business itself had been very successful over the years and its owners had reached the stage where they were ready to sell it and realise some value. Their first move was to take the business to market, to see what their options were in terms of potential buyers. However, as they were in a sector where the climate for buying and selling businesses of this type wasn’t particularly buoyant, they didn’t receive a high level of interest from third parties.
We sat down with them again to look at their situation and reassess their options. There was plenty of cash in the business. The current owners were ready to start making the transition away from the everyday running of the business but were still open to having a presence in the short term. There was also a strong second tier of management in place below the owner-managers of the business who were capable of taking on ownership. This is when we suggested they consider a VIMBO.
How Does a VIMBO Work?
Unlike a normal Management Buy-Out (MBO), when the management of the business approaches the owners with an offer to buy them out, a VIMBO is the other way around. It’s when the existing owners approach the current managers and suggest they buy the company from them. Rather than raising private equity investment and/or bank debt to acquire the business, the management can use the cash in the business, and the business’ ability to generate more cash in the future, to buy it.
When advising a client who has chosen this route, the first thing we do is analyse the business and work out its value, the level of “free cash” and the strength of its pipeline and ability to service some debt. Once you’ve done this you can calculate the level of cash that can be extracted on day one and how much of the value needs to be paid on deferred terms over an agreed period without putting the business under financial strain.
Any business choosing the option of a VIMBO needs the right guidance according to their individual circumstances. It’s particularly important that the owners don’t take too much cash out of the business initially, which might put it in a difficult position commercially. Careful analysis of the working capital needs of the business is needed here to make sure that it still has the right amount of cash on the balance sheet to continue trading effectively. It’s in neither parties’ interest to put the business into financial difficulty.
What are the Benefits?
The key benefits of the VIMBO are that it allows the business owners to realise some value immediately while also enabling them to retain some connection with the business and oversee the succession. The owners get their realisation ‘event’, and the company benefits from some consistency and stability as it makes the transition to the new ownership. In the example above, we structured a deal which allowed the shareholders to de-risk the effort they had put into the business over the last 10 years by funding the sale from the company’s cash resources and strong forecasted performance, whilst handing over control to the new management team.
Subject to obtaining prior tax clearance from HMRC, there are also tax advantages for the owners in taking this route. If the owners had continued to run the business as the management team they would have been taking money out of the business as a salary, subject to higher income tax rates of 40% or 45%, or as a dividend, taxed at 28%. By realising the value through a properly structured VIMBO, they became eligible for Entrepreneurs’ Relief, which allows them to benefit from a 10% tax rate on all the sale proceeds (i.e. the cash on day one and deferred cash payments).
Progeny’s Unique and Bespoke Service
Planning for your financial future, preparing to sell your business and putting an effective succession plan in place are all often inextricably linked, so it makes good sense to tackle them all together. Progeny’s unique framework of wealth management advice and corporate and private legal services allows us to do this, and to provide the sort of bespoke service our clients need to help them achieve all their professional and personal ambitions in the best and most effective way possible.
If you would like some advice and support with succession planning for your business, or with any other aspect of your financial and legal future, please get in touch.
The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Corporate Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.