The mechanics of a management buy-out

Chris Brown - Brown & Co

There are two main structures for management buyouts, and the right one for your situation will depend on factors such as how the transaction will be financed.

Company purchase of own shares (CPOS)

The company effectively buys back and subsequently cancells the shares held by those individuals exiting the business.

While this is generally more straightforward to implement, particularly from a legal perspective, and therefore cost effective, it is only suitable in certain circumstances.

For example, it requires that all consideration owed to the exiting shareholders is settled in full on completion, with no ability to pay the consideration to the shareholders on a deferred basis.

In addition, the company must have sufficient distributable reserves (shown on the balance sheet) to match the proceeds, whilst leaving adequate cash in the business post-sale for the company’s working capital requirements.

Proceeds received by the exiting shareholders are treated, as standard, as a distribution subject to income tax rather than capital gains tax.

There is strict criteria which must be met to secure capital gains tax treatment.

Newco buy-out (Newco)

A new company is formed to acquire the entire issued share capital of the existing company from the current shareholders.

Those exiting the business are paid for their shares, and those intending to continue simply receive shares in Newco to replace their old shares. The consideration can include deferred elements if required, giving more flexibility in settling the consideration.

The conditions which need to be met in order for the proceeds paid to the exiting shareholders to be assessed under capital gains tax, are more easily satisfied under a newco buyout than a CPOS.

The new owners can determine the ownership structure of newco.

In both options, it’s recommended that advance clearance is sought from HMRC in order to ensure all the criteria is met for agreement on the tax treatment.

In the majority of cases, a newco buy-out is likely to be the preferred route, as payment is more flexible with fewer potential tax and commercial issues for both exiting and ongoing shareholders.

In addition, a CPOS is only appropriate where there will be no new shareholders, whilst the newco buy-out allows for both new and existing shareholders.

Enjoyed this? Read more from Chris Brown, Brown & Co

Latest news

1

Blackpool approves plans for pair of apartment complexes New South Promenade Apartments Visuals

Blackpool approves plans for pair of apartment complexes

12 Apr 2024

2

International building supplies firm to open new plant in Preston New Kerakoll Group Premises Visuals

International building supplies firm to open new plant in Preston

11 Apr 2024

3

Distinguished engineer takes senior role at Lancaster University Rebecca Lingwood

Distinguished engineer takes senior role at Lancaster University

11 Apr 2024

4

Lustalux helps with the £21m refurbishment of Printworks Manchester pw-sign-manchester.jpg.jpg

Lustalux helps with the £21m refurbishment of Printworks Manchester

12 Apr 2024

5

Alcedo appoints mobilisation team to facilitate expansion Alcedo Care Group mobilisation team LtoR Kirsty, Chelsea, Claire, Sophie, Jessica and Rob smaller.jpg.jpg

Alcedo appoints mobilisation team to facilitate expansion

12 Apr 2024

Hwc 2024 Email Signature 980x120
Background image for hub sign up block

LBV Hub

Reach 50,000 members of the Lancashire business community

Post your news
Post your events
Post your offers
Company profile
Social reach
Magazine coverage
Sign-up
Events
Health and Wellbeing Conference 2024
Hwc 2024 Social Media 1200px 1
Networking
23 Apr 2024

Health and Wellbeing Conference 2024

Crow Wood Hotel, Burnley , BB12 0RT

08:30 - 13:00

Help to Grow Management Course
HTG2.png.png
LBV Hub Seminars
15 Apr 2024 - 17 Jul 2024

Help to Grow Management Course

Preston Campus , Preston , PR1 2HE

09:30 - 14:00

Business Networking in Chorley - BNI Endeavour
EVENT LISTING SIZING Endeavour.png.png
LBV Hub Networking
16 Apr 2024

Business Networking in Chorley - BNI Endeavour

Oak Royal, Bury Lane, Chorley, PR6 8SW

06:30 - 08:30

Business Networking in Blackburn - BNI Vista
EVENT LISTING SIZING Vista.png.png
LBV Hub Networking
16 Apr 2024

Business Networking in Blackburn - BNI Vista

Hampton by Hilton, 2 Frontier Ave, Blackburn, BB1 3AL

06:45 - 08:30

Business Networking in Lancaster - Eden Business Network
EVENT LISTING Eden Business Network.png.png
LBV Hub Networking
17 Apr 2024

Business Networking in Lancaster - Eden Business Network

The Borough, 3 Dalton Square, Lancaster, LA1 1PP

18:30 - 20:30

Business Networking in Accrington - BNI Zeus
EVENT LISTING SIZING Zeus.png.png
LBV Hub Networking
17 Apr 2024

Business Networking in Accrington - BNI Zeus

The Mill House, Corn Mill Yard, Accrington, BB5 5HX

06:45 - 08:30

Business Networking in Preston - BNI Diamond
EVENT LISTING BNI Diamond.png.png
LBV Hub Networking
17 Apr 2024

Business Networking in Preston - BNI Diamond

The Marriot Hotel, Garstang Road, Broughton, PR3 5JB

07:15 - 09:00

Business Networking in Burnley - BNI Kudos
EVENT LISTING BNI Kudos.png.png
LBV Hub Networking
18 Apr 2024

Business Networking in Burnley - BNI Kudos

Prairie Sports Village, Windemere Avenue, Burnley, BB10 2FU

06:45 - 08:30

Cyber Secure 360: Safeguarding Your Digital World
CyberSecure 360 LBV-32.png.png
LBV Hub Seminars
18 Apr 2024 - 18 Apr 2024

Cyber Secure 360: Safeguarding Your Digital World

Accrington Stanley, Accrington, BB5 5BX

08:30 - 12:00

Business Networking in Preston- BNI Brunch
EVENT LISTING SIZING Brunch .png.png
LBV Hub Networking
19 Apr 2024

Business Networking in Preston- BNI Brunch

Samlesbury Preston Hotel, Preston New Road, Preston, PR5 0UL

09:30 - 11:00

The Pro Club
Untitled design (6).png.png
LBV Hub Networking
19 Apr 2024

The Pro Club

Fraser House, Lancaster, LA1 4XQ

09:30 - 12:30

Business Networking in Blackburn - BNI Infinity
EVENT LISTING BNI Infinity.png.png
LBV Hub Networking
19 Apr 2024

Business Networking in Blackburn - BNI Infinity

Hampton by Hilton, 2 Frontier Ave, Blackburn, BB1 3AL

06:30 - 08:30

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more Lbv115 Online Graphic
Subscribe now

Weekly news bulletin