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Why the Government should give tax breaks to small MBO / MBIs

TL:DR Funding an MBO is always a challenge and that challenge is made all the more demanding by the fact that there may be a range of taxes to pay when a business changes hands. At Rangewell, we believe that MBOs and MBIs are a vital part of the evolution and development of any business. Not only are we committed to supporting businesses and helping them find the funds they need – and we are lobbying for government support to make MBOs successful by arranging tax breaks to support them.

The UK is a good place to do business these days. Many business sectors, from games design to specialist automotive technology, have success stories to tell.

But British business needs all the help it can get right now. With Brexit meaning some confusion, as well as new opportunities, and lockdown dragging on and putting the brakes on many businesses that should be forging ahead, the government needs to act.

At Rangewell, we believe that one of the key changes that the Chancellor should be making right now is to create tax breaks for small MBO / MBIs.

Looking at an MBO/MBI? Contact us today to get the most appropriate funding route for your plans 

Just what are MBO / MBI – and what taxes do they currently involve?

A Management Buyout, or MBO, involves the acquisition of a business by its existing management team. In most cases, this is done with the help of private equity or other external financing. It often occurs as a means of ensuring the continuation of the business on the retirement or departure of the founder and owner, who will naturally be expecting to be rewarded for the years of hard work they have put in.

The managers continue to manage their business post-acquisition. Depending on the way the deal is structured, they may finance their buyout by debt or equity.

In either case, they are seen as a relatively low-risk investment option. This is because the business is already established and the managers now running it know the business and the market that it operates in very well. Many businesses are given a new lease of life in this way, growing and thriving as energetic new owners contribute hard work and new ideas to make the most of their business.

A Management Buy-In or MBI also involves a change of ownership for the business – but in the case of an MBI, the management team will be an external one. Experienced managers from outside the business who can see the potential it offers will provide finance to acquire ownership and control of the business.

In some cases, an MBO will be combined with an MBI, bringing in external people to reinforce an existing management team.

The costs will be directly comparable to what it would cost to buy the entire company. There are many ways to deal with these costs. Once a price has been agreed, it usually requires a combination of debt and equity that is derived from the buyers, financiers and sometimes even the seller, and can be structured in a number of ways, for example, a conventional purchase or even a Leveraged Buyout.

Butt securing the funds may only be part of the challenge. A number of tax issues will arise for each of the parties involved in an MBO. The structure of an MBO in the UK will vary depending on the complexity of the transaction. The most basic structure is for a new company to be incorporated to buy the target business. This company acts as both the investment and the acquisition vehicle.

More commonly, however, two or more grouped companies will be incorporated, each of which will have a different function within the acquiring group. One company will be the new group parent company post-acquisition (Newco 1) and another (Newco 2) will acquire Target and borrow money to finance the transaction. There may also be intermediate companies that raise finance.

An experienced accountant team will be required to establish the most appropriate structure for the deal. 

However, even with expert help, a number of tax issues can include income tax on shares issued to management and related PAYE and National Insurance contributions(NIC) liabilities.

The precise nature of the tax charges will depend on how the MBO/MBI is structured, but the current position is that there is no tax relief available from capital gains tax (CGT), taper relief or enterprise investment relief (EIS).

This can mean that the taxman is, in effect, putting the brakes on MBO/MBI activity. By taking what can be a substantial proportion of the available cash in the business, he may make a potentially viable MBO or similar deal much less attractive, and in some cases actually put what should be a viable business in a position where any kind of buyout is not viable for those concerned.

What can be done to help?

At Rangewell, we provide funding for all types of business needs – including MBOs and MBIs. We know that problems with tax can spell the end of what would be viable small companies – and we have come to the conclusion that in the current economic climate, the burden of tax is simply too great for some deals to go through.

We want to propose to the Chancellor a tax concession.

In a nutshell:

  • For MBO/ MBI deals relating to small companies under £15m of value, and where management who have been in place for over 3 years are buying out the current owners, to forgo all tax on the deal.

We believe that this will encourage MBO activity, making the companies concerned, and as a result the country, more productive. With a new or at least remotivated management team, smaller businesses are more likely to take on more staff, more likely to export and to innovate – and more likely to succeed in the current climate.

We hold that the costs to the exchequer would be minimal – and more than compensated for by the additional economic activity generated.

We will be putting our views to the Chancellor in the next few days. We hope to be able to update you with his detailed response to our proposal.

If you are a business owner or a member of a management team who is currently considering a management buyout, we may be able to find the funding you need to take your plans further.

To find out more, call Rangewell for an informal discussion on 020 3318 2613 or email [email protected].

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