Management Buy-Out. How Can This Work?

Management Buy Out

Last week we look at Part 2 of the Do’s and Don’ts when exiting a business. In case you missed it click here.  This week we are going to look at a Management Buyout and to see how that can work. The main discussion points will be

  1. How to do this
  2. The rest of the money
  3. What to watch out for

How to do this

The first step is a valuation. This is vital for the departing owner and vital for the purchaser. The seller wants to ensure they are getting the correct value for their business. The purchaser wants to know that they are paying a fair price. Not only this but Revenue would expect a valuation. The seller will be claiming CGT reliefs. You have to assume that Revenue will take a keen interest in larger transactions. Especially where taxpayers claim reliefs that result in no tax or a lesser amount of it. For more information on a Company valuation see here

After both sides agree on the number then what is the structure to complete the transaction? Plus, how will the purchaser pay for it? It is common for the management team to set up a new company. This company would buy the shares of the trading company. In effect, this company would become a holding company above the trading company. This has advantages over the individuals buying the shares.

It would be unusual for the management team to have enough funds to complete the purchase. The seller may be willing to accept a lower price if he/she can get paid in one go at the time of the transaction. The seller will expect a lump sum payment at the outset and the purchasers will have to fund this. They can introduce their own funds into the new company they set-up. They will have to work with finance providers to secure the balance of the purchase price or the lump sum. Certain lenders will be open to provide finance once there is a clear ability to make repayments. A lot will depend on the track record of the trading company and its ability to generate profits. Any existing cash balances in the trading company will also help.

Harry and Gareth are the senior management team of Chiellini Suits Ltd. Giorgio and his wife Ambrosia own 50% each of the shares and would like to sell the business to Harry and Gareth. They get a company valuation, and they agree on the number at €1.2 million.

They agree to pay €750,000 upfront and €150,000 per annum for the next 3 years. Harry and Gareth set up a new company, Eurowinners Ltd, to buy the shares from Giorgio and his wife. H&G put in €50,000 each into the Eurowinners Ltd and they go to the bank to secure a loan for €650,000 for the lump sum balance. There is now €750,000 in Eurowinners Ltd and the company buys the shares from Giorgio and Ambrosia. Now H&G own 50% each of Eurowinners Ltd and that company owns 100% of Chiellini Ltd.

The rest of the money

So, Giorgio and Ambrosia got €375,000 each, so far, but they are due another €225,000 each. In the share purchase agreement, they agree on an earn-out of €150,000 per annum. They agree to pay this money once the company meets set performance targets. This could be a certain turnover number or a certain profit figure. This element should be clear from the outset with some restrictions in place. The restrictions are there to protect the sellers. An example of this is a restriction on the value of salaries and pension payments that H&G take in the earn-out period. This would ensure that expenses are not inflated as this could impact the profit number.

Once the performance targets are met each year then Eurowinners Ltd will pay Giorgio and Ambrosia €150,000 for each of the next three years.

Remember it is Eurowinners that owes the balance of the money. But the cash generated from future profits is in Chiellini Ltd. To get the money into Eurowinners Ltd Chiellini Ltd would pay a dividend of €150,000 per annum. The advantages of doing this are

  • There is no dividend withholding tax on the payment of the dividend
  • Eurowinners Ltd doesn’t pay tax on the dividend

To ensure you get these advantages the paperwork has to be right. This includes an election on the CT1 and a dividend withholding tax return. Once Eurowinners is in funds then it would pay the money to the Chiellinis. Another way to do this is to loan the money from the trading company to Chiellini Ltd.

What to watch out for

Revenue introduced anti-avoidance legislation in this area. What they are trying to achieve is to limit the ability of a seller to use company assets to fund the exit.

Let’s assume that Chiellini Ltd has €650,000 in cash before the sale of the business. Rather than take out a bank loan H&G pay a dividend of €650,000 from Chiellini Ltd to Eurowinners. Eurowinners then pay that money to the Chiellinis for their shares. The anti-avoidance legislation catches this transaction. It treats the payment of €650,000 as Income in the hands of the Chiellinis and they would suffer Income Tax on this. At 52%, this would be an Income Tax liability of €338,000. The reason is that the assets of the company, company cash, has been used to fund the transaction.

This legislation is quite new and hasn’t been tested at the Tax Appeals Commission or in the Courts yet. Per Revenue guidance, the anti-avoidance legislation doesn’t come into play where

  • the purchasers use their own funds and/or
  • they secure external funding from a bank etc

The seller mustn’t be a party to the funding application. They may be aware of it but should not be involved in the process.

And our heroes?

Even though the Chiellinis don’t get all their money until the end of 2024 they pay the Capital Gains Tax in 2021. They pay this on the full amount as they know what the proceeds are. If they are under 66 and can avail of Retirement Relief, they will pay no CGT. If they are over 66 and can avail of Retirement Relief, they would pay €50,000 each in CGT. This is 50% of the excess over €500,000. If they can’t get Retirement relief then Entrepreneurs Relief [ER] could be a potential. With ER their tax liabilities would be €60,000 each.

The Chiellinis moved to Sicily and Don Giorgio bought a farm of wild goats. This was apt for him given that he and the goats shared many of the same characteristics. Tough, strong, loved challenges, and performed in all sorts of weather. As for Harry and Gareth they too had great success. Their buddy Raheem gave them a huge amount of business after a recent win he had. They made suits for the Royal family and the English football team and got all sorts of awards for their skill. They got a knighthood from the Queen and are now Sir Harry and Sir Gareth. There was no stopping them and even Celebrity Love Island came calling!


The purpose of the above is to arm you with more information on this topic. If business owners don’t have a family member they want to pass the business to, then an MBO could be an option. Once the new owners have the right skills and support to help them to continue and grow the business, they will have great opportunities. They will become the new entrepreneurs and will look to exit themselves in years to come. This area is fraught with danger given the anti-avoidance legislation. Make sure you talk to your accountant and tax advisor before doing any transaction.

Interested in talking to us. Call Deirdre on 051396703 or start here. Tell us about you and your business and we’ll see if we can help.