The use of the VIMBO in the time of COVID
In the latest UK200Group blog, Richard Gibson, Corporate Finance Partner, Armstrong Watson LLP discusses how business owners are increasingly looking to the Vendor Initiated Management Buy Out (“VIMBO”) as a potential exit route.
Heading up the Glasgow office and Corporate Finance department
, Richard is a widely experienced Chartered Accountant and corporate adviser specialising in acquisitions and disposals, MBOs and MBIs.
Richard specialises in post-deal integration advice and, over his broad career, has supported a wide range of clients in preparing for and structuring M&A transactions. He has specific and deep operational knowledge of the buy and build sector, having advised a number of operators on a range of financial and strategic matters, including acquisitions, disposals and finance raising.
As we enter the Winter of 2020, amid ongoing and ever changing levels of lockdown, it is only natural for business owners to wonder if the pre pandemic world we lived in will ever return.
While many businesses have shown remarkable agility in changing their model to cope with the “new normal”, and owners have shown their typical tenacity and determination to see their business through the current situation, it is only natural for them to look at the future and wonder what the next few years may hold. Plans to sell, or wind down have, in many cases, had to be shelved.
In addition, in recent months, there has been the rise of the expression “Director Fatigue” – as the time and effort that has been spent on their business has increased the feeling of being “trapped”, while watching their chances of an eventual exit look less and less likely in the near future.
While traditional disposals are still happening, a natural nervousness on the part of both the buyer and the seller mean that these are less frequent than we have seen previously. In an attempt to manufacture a solution to the problem, owners are increasingly looking to the Vendor Initiated Management Buy Out (“VIMBO”) as a potential exit route.
A VIMBO is very similar to any other Management Buy Out (“MBO”) but with one important difference - the vendor is the one who initiates the process and makes the approach to management. The benefits include:
• The vendor is selling to an individual or group who know and understand the business, and will see its potential, notwithstanding the current climate.
• The business owner has a greater degree of control over the process; for example, price, timing, warranties and indemnities offered, or retaining a stake.
• With a VIMBO, the vendor usually has visibility of the management team’s thought processes, concerns and attempts to raise funds.
• The vendor retains valuable influence and visibility on the business performance following completion of the transaction.
• A VIMBO offers a flexible approach that can be tailored to each specific case e.g. if the management team are not in a position to personally fund a material level of the consideration there are often a number of options to work around this; a self-funded model, for example, is used regularly in VIMBOs so the new management team are not beholden to banks or private equity houses.
• The potential commercial risks of openly marketing your business are almost entirely eliminated, as the deal effectively takes place behind closed doors.
A VIMBO provides an added incentive to the management team and eliminates the uncertainty of a sale to a third party. Those in the business will understand it and appreciate its value and thus can be a more straightforward sale than to a third party. Due diligence is often more limited, and the transition is smoother for staff, suppliers and customers.
A sale of course provides the vendor with proceeds in a tax efficient manner, taking advantage of current incentives.
However, the danger of approaching a management team without guidance and support may lead to them being unsettled and concerned.
The first step is almost always a feasibility review. Before engaging with the management team, it is important to identify what the business is worth, what debt can the balance sheet support, and what the cash generating capabilities of the business might be post transaction.
As any business sale can be a complex transaction, which can be daunting to a management team, a VIMBO in particular needs to be positioned in a straightforward manner. It is essential therefore, that the vendor fully explores the options and encourages the MBO team to take professional advice as soon as the managements interest in the business is established.
The funding of a VIMBO, and in particular the deferred consideration element, along with the management’s equity contribution, need early consideration. Flexibility from the vendor, or in certain cases, third party equity, will often be required.
Unusually, the initial draft of the legal documentation is undertaken by the vendor’s legal advisers, simplifying the process further for the Management Team. In some cases, the fundraising for the VIMBO is also initiated by the vendor.
VIMBOs present a straight forward, highly flexible option for vendors to secure an exit in a very tax efficient manner, whilst offering a fantastic opportunity to the management team, and although they do require careful planning and goodwill on both sides, they are incredibly effective when executed professionally, even in the current climate.
There is no doubt about it, at the moment the retiring business owner may well find it difficult to find a buyer for their business, let alone one that will pay full value in the current climate. Indeed, many business owners may not even consider it possible to sell their business right now or for the foreseeable future. The VIMBO may well be an option, but it can’t be imposed on the management, and will only succeed if all parties are confident of the ultimate success of the business.
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