Demerger and Management Buy-Out for an Owner-Managed Plant and Machinery Business

Demerger and Management Buy-Out for an Owner-Managed Plant and Machinery Business

The owner of a plant and machinery sales and hire business wanted to retire and sell to a senior employee. When trading turned difficult, the price became unaffordable. This is how our team rebuilt the deal in three stages: a demerger, a management buy-out (MBO) and then Inheritance Tax (IHT) planning.

At a glance

• Client: an owner-managed plant and machinery sales and hire business worth around £4.5m, with trading premises worth around £1.35m
• Aim: the owner to retire and sell to a senior employee who already held 10% through an Enterprise Management Incentive (EMI) option scheme
• Obstacle: difficult trading made the planned MBO unaffordable
• Solution: demerge the premises, then sell the trading company to the buyer
• Stages: demerger, MBO, then IHT planning

The client

The client was an owner-managed plant and machinery sales and hire business worth around £4.5m, with trading premises worth around £1.35m. The shareholder wanted to retire. The intended buyer was a senior employee who already held 10% of the company through an EMI option scheme.

The challenge

During negotiations, the business went through a period of difficult trading. The planned MBO became unaffordable. A sale to a third party was a realistic alternative.

The shareholder still wanted the senior employee, the New Management Individual (NMI), to have the chance to buy the business. The task was to find a structure that kept that possible.

What we did

We saw that taking the trading premises out of the deal could cut the purchase price significantly. That would make the MBO commercially viable, and it would let the property be bought separately in the future. We ran the work as three stages.

• Valued the business and mapped the ownership. We prepared a valuation of the trading company and detailed capitalisation tables for every phase of the transaction.
• Designed and implemented a capital reduction demerger. The £1.35m premises moved into a property company. That reduced the value of the trading business. It also gave an incidental uplift in the property's base cost to market value.
• Prepared the paperwork for HMRC. This covered accounting transaction summaries, a detailed technical feasibility report, a step plan for each stage and the matching HMRC clearance application.
• Structured the MBO. The price combined cash consideration, deferred consideration and preference shares redeemable over five years.
• Negotiated flexibility for the buyer. Deferred payments could flex with future cash flow, with step-in rights for the exiting shareholder.
• Worked with the client's solicitors. We reviewed the legal documents and advised on amendments so that the tax position was protected.
• Planned for IHT afterwards. We advised on a gift of shares in the demerged property company into trust.
• Resolved VAT group issues. Registration and deregistration questions arose from the restructure. We dealt with them with the client and HMRC.

The outcome

All three stages completed as planned. The £1.35m premises moved into their own property company by capital reduction demerger, with HMRC clearance, and the property picked up an uplift in its base cost to market value along the way.

With the premises out, the trading business was worth less, and the buy-out became affordable. The management buy-out completed on the structure we designed: cash, deferred consideration and preference shares redeemable over five years, with flexibility in the deferred payments and step-in rights to protect the retiring shareholder.

Finally, shares in the property company were gifted into trust as part of the inheritance tax planning. The new management team also has the option to buy the property separately in future, when they are ready.

Why it matters

A deal that no longer works as one transaction can sometimes work as two. Separating the property from the trade changed what was being sold, and so what had to be paid for. It is also worth planning the tax and the legal documents together, so that the structure agreed commercially is the one that is delivered.

If you are planning a sale to management and the price looks out of reach, see our capital reduction demerger and exit planning pages, or book a call with our team.