Corporation Tax

Introduction to management buy-outs (MBO)

Produced by Tolley
  • 23 Mar 2022 10:50

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Introduction to management buy-outs (MBO)
  • Basic structure of the MBO
  • Other structuring considerations ― funding for the transaction
  • Other structuring considerations ― stock stapling
  • Due diligence
  • Company taxation following the MBO

Introduction to management buy-outs (MBO)

Basic structure of the MBO

An MBO takes place when the management team, which typically includes directors and first tier management, enters into an agreement to purchase an existing business. The usual form of an MBO is either:

  1. the acquisition of the shares in the target company (Target) by a company newly incorporated by the management team to make the acquisition (Newco)

  2. the acquisition of the trade and assets of Target by Newco

  3. the transfer of Target’s trade to a subsidiary of Target (Target Subco) followed by Newco’s acquisition of Target Subco (known as a hive-down)

Other structuring considerations ― funding for the transaction

The management team will invest funds into the new structure, which will usually consist of a combination of share capital and loan financing (eg loan notes). By owning an equity stake in Newco, the management team have the incentive of benefiting from the capital growth of the company on future disposal of their shares. It may be possible that the transaction can be structured a way that the investors benefit from EIS relief. See the Enterprise investment scheme ― introduction guidance note for further details. The management team may also benefit from business asset disposal relief

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