Case Study: Management Buy-Out of a Design Engineering Business

The owners of a design engineering business wanted to sell to the managers who ran it day to day. The deal was worth between £5m and £20m. This is how our team structured it, and how the sellers kept capital gains treatment.

The client

The sellers were the business owners. The buyers were their own management team, who would take over and lead the company after completion.

The challenge

• Paying the price. The managers could not fund the full amount at completion. Much of the price had to be deferred and paid out of the company's future profits.
• Income or capital. When a business effectively pays for its own buy-out, HMRC may take the view that the sellers are extracting profit. Payments could then be taxed as income at dividend rates instead of as capital gains.
• Valuation. Buyers and sellers were closely connected, so the price had to be supportable on commercial grounds and in the eyes of HMRC.

What we did

• Designed the structure of the deal, including how the deferred price would be paid from future profits.
• Supported the valuation, working with the valuers to reach a figure that could be defended.
• Applied to HMRC for clearance, to confirm that the sellers' proceeds would be treated as capital.

The outcome

• HMRC confirmed capital treatment for the sellers.
• The deferred payments were set at a level the business could sustain.
• The deal completed smoothly, and the management team was in place to lead the business.

Thinking about selling to your own managers? Our team can test the structure, the valuation and the clearance position before you agree terms. Book a call to find out where you stand.

For a closer look at selling or buying a business, see our specialist practice, Transaction Tax Partners.