How can we fund an MBO with a partner company?

How can we fund an MBO with a partner company?

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I run a business (I am an employee and major shareholder) that has received an investment round approximately 2 years ago, and we now have an interested party who want to utilise some assets we have developed over the past 2 years and wants to partner with us with an ongoing revenue agreement from the assets. However, they are adamant that this is contingent on the buyout of the investors due to special restrictions and rights that they have. They have agreed to fund this transaction as part of the deal to get the assets, however, for various reasons, the interested party cannot buy and hold the shares themselves, and is not interested in owning part or all of the company - they are only willing to fund the buyout of the investors, and do not want an overly complex transaction.

We have looked at various scenarios on how this transaction can be achieved, and have reached various issues concering the tax treatment of the transaction:

- If the interested party bought the shares and then as part of the same transaction sold them at nominal price to those is the company (myself included), I understand this would create an income tax liability for us since the shares will be being gifted to employees.

- The company does not have the retained earning to perform a buy back, and it is my understanding that this could cause the gain for the investors (due to the short time they have held the shares) to be liable for income tax rather than CGT (which is not acceptable to them). Furthermore, any money provided to the company from the interested party would be liable to corporation tax.

 - If the interested party provided the funds directly to the employee members to finance an MBO, the funds would obviously be subject to income tax.

Our current idea is if the interested party funded the MBO by providing a loan to the current employees to perform the buyout, but we have then run in to the problem of how we then repay the loan (even though this money should not 'technically' need repaying!).

Any thoughts would be much appreciated!

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By Steve McQueen
15th Jan 2013 08:39

Have you taken advice?

Morning, 

Have you spoken with your accountants?

I have undertaken many corporate finance deals over the years and you are going to need professional advice.

The company being purchased is going to need a "whitewash" undertaken to confirm that it remains solvent in the years following the MBO is its funds are to be used for the repayment of the loans.

You will also need specific legal help.

PM me if you have no existing relationships and I will be delighted to get involved.

Steve

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By George Attazder
15th Jan 2013 09:37

Whitewash?

I thought CA 2006 did away with the whitewash with effect from 1 October 2008?

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