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Accountancy Treatment of an MBO

Hi All

I'm due to join a company that has just been acquired through a management buy out and am required to post the necessary treatment of the new structure but I am unsure of the specifics. The situation is as follows:

Details prior to take over:

The company had less than 10 shareholders that all had outstanding loans that were to be repaid back by the company

A share capital and share premium account

The company was/is running at a loss which is reflected in the P&L reserve

Details post takeover:

A single shareholder has purchased the shares of the other shareholders at an agreed premium

The purchase has been funded by an external loan and loan notes ill be issued

A new holdings company is to be created, that owns 100% of the trading company

As I have never been involved in an acquisition before I would really appreciate some advice on how I treat the above, I'm unsure of the technical treatment of this acquisition/MBO, including goodwill calculations, reserve accounts to create/use for both the existing and the new holdings company, accounting standards to adhere to etc

Any advice is most greatly welcomed, or if anyone could point me in the right direction of where I could find such advice/guidance?

Thanks in advance

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03rd May 2012 13:09

MBO

A) PURCHASE OF SHARES:

THIS IS A SHAREHOLDER DEAL BETWEEN OLD AND NEW SHAREHOLDERS(HOLDING COMPANY), IT DOES NOT AFFECT THE SUBSIDIARY COMPANY BOOKS.

SUBSIDIARY

B) LOAN NOTES

PRESUMABLY ISSUED BY THE COMPANY IN RETURN FOR A LOAN TO THE COMPANY BY THE NEW SHARE HOLDER WHO BOUGHT THE SHARES.

i) dr loans ACCOUNTS REPAYABLE -LTERM DEBTORS

  cr RELATED PARTY/INTER-COMPANY LOANS

THERE ARE NO SHARE CAPITAL JOURNALS BECAUSE NEW SHARES ARE NOT BEING ISSUED.

 

DONT CONFUSE THE BOOKS OF HCO WITH THE BOOKS OF SUB.

THE TOTAL COST OF THE SHARES WILL BE RECORDED IN hco AS AN INVESTMENT BEING FINANCED BY SUBS LOAN NOTES AND EXTERNAL LOAN(PRESUMABLY SUB CAN FINANCE FURTHER GEARING EVEN THOUGH ITS MAKING LOSSES)

 

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avatar
06th May 2012 18:09

Hi David thanks for your reply its much appreciated

 

There has been a movement in the shares, they have reduced from 10,000 at nomial value of 10p to 60 at nomial value of £1. Would this mean that the existing share premium account is to be written off? (if so where too?)

 

There is also an issue of the Goodwill/Investment value calc for the Hco books, as the subsidiary had negative net assets at date of acquisition, my understanding is that usually goodwill would be calculated as the Purchase Price less the value of the subs net assets on date of acquisition and the lnvestment value would be the purchase price less the value of the goodwill.With there being negative net assets I'm unsure of how that would affect the goodwill/investment calcs?

 

Cheers

 

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