Have Your Cake and Eat It

Neil Grimmond explains what a VIMBO is and why it can be a win-win solution for business owners looking to sell to their management teams.

Everything you always wanted to know about a VIMBO but were afraid to ask

Q: What does VIMBO stand for?

A: Vendor-Inspired Management Buyout

Q: It sounds complicated – what does that mean?

A:  It is a commercially and tax efficient method of transferring ownership of a company from the existing owners to the management team over an agreed period of time in a way that delivers benefits to both the vendor and the buyers.

Q: How is a VIMBO funded?

A: The vendor sets the price and terms for how it will be paid. One key advantage of a VIMBO is that it offers flexibility – deals can be fine-tuned to suit the needs and circumstances of the vendor, the buyers and the company’s finances. Deal finance can include staged payments in cash from the company’s balance sheet, bank debt, exercise of existing share options, or loan notes.

Q: What is the normal timescale for a VIMBO from beginning to end?

A: It depends on the deal but typically between 4 and 7 years. The shorter the timeframe, the greater the likelihood that the management team will have to raise finance to do the deal, making it less attractive or affordable to them. A longer timeframe makes it easier for the buyers to fund staged payments but it is important to strike a balance so that vendors are also happy with the time it will take to be paid in full.

Q: Is it suitable for any kind of private company?

A: It is a flexible solution which can in theory be applicable to companies operating across most sectors and for either family-owned firms or for private companies with different ownership structures. We have advised on and structured successful VIMBOs for over 30 companies engaged in sectors as diverse as construction, manufacturing and professional services.

Q: Is there a minimum financial threshold for a VIMBO?

A: Ideally the company you plan to sell should be making annual profits of at least £0.5 million in order to realise maximum benefit for all parties – of course it can be considerably higher.

Q: What are the main financial benefits?

A: It is tax-efficient because share sales linked to a change in ownership are classed as a capital event so can be taxed at 10%. For the vendor, a VIMBO puts them in control of agreeing the exit price, generating a higher net return than if they had sold to a third party. For buyers, it offers a chance to acquire ownership of the business they work for in an affordable way and often without significant external financing.

Mini case study: A VIMBO in action

Two founders and majority shareholders of a profitable and cash-generative private business were looking for an appropriate solution which would allow them each to realise optimum value from the company they had worked hard to build over 15 years while simultaneously leaving the business in good shape for the future.

They wanted to bank some money in a tax-efficient way and ultimately to move on and consider new opportunities. However, they did not want to risk destabilising the business by making an abrupt departure which might be misinterpreted by clients.

They were also keen to offer their hard-working management team a golden opportunity to acquire ownership of the company but concerned that they were too inexperienced to assume full responsibility for strategic decisions immediately. They wanted to incentivise the team to stay, to support them as they grew into new roles, and to afford them sufficient financial headroom to participate in a buyout without being personally financially overstretched.

The duo were committed to playing a long game in several important respects:

  1. the amount of time they were prepared to wait to receive full payment for their shares – in this case seven years
  2. ensuring an orderly handover to the management team
  3. managing external perceptions for the long-term good of the business
  4. agreeing staged payments that would ultimately yield greater net proceeds than a sale to a third party would likely have done.

A carefully planned 12 month under-the-radar operation ensued to structure and execute a deal that would deliver benefits to all parties. It resulted in the existing Company being acquired by a NewCo, with the purchase part-funded by cash balances in the existing Company. Many of the management team held share options and the proceeds from their participation in the sale meant that, with only 1 exception, they avoided having to find additional finance for their personal contribution to the buy-out.

The founders acquired minority stakes in the new company which had a more diverse shareholder base. Members of the management team stepped up to the board and began to assume strategic roles with the support of the founders who were able to plan a slow withdrawal on their own terms.

Financially, the deal was an indisputable success for both vendors and the buyers. Importantly it also avoided the uncertainty and upheaval associated with alternative exit strategies such as a third party sale or private equity backed buyout which may have included more pressure on management to develop and perform in a shorter timeframe. In this case, both sides of the deal definitely consider they were able to ‘have their cake and eat it.’

Neil Grimmond
About the author

Neil joined Craig Corporate in 2005 and has been involved with both corporate finance and business management assignments. Corporate finance projects have ranged from diligence to...
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by Neil Grimmond