A Vendor Induced Management Buyout (“VIMBO”) can be used as a means of passing a business to the next generation, so keeping the business in the family, while providing a retiring owner with exit proceeds in a tax efficient manner.

The purchaser of the business in a VIMBO transaction would normally be a newly formed company (“Newco”) which would satisfy the purchase price with a combination of cash and loan notes issued by Newco to the retiring owner. The cash element of the purchase price might be raised by Newco from a third party lender, such as a bank, and could be secured on book debts or other assets of the business. Sometimes the business itself has cash reserves which can be used by Newco to fund, or partially fund, the cash element of the consideration.

The loan note element would usually be payable over three to five years depending on the cashflow requirements of the business.

The sale qualifies for entrepreneurs relief so that the retiring owner will pay tax at 10% on the sale proceeds. This is far more tax efficient than the owner retaining the business and extracting income through salaries and dividends from the business post retirement. However in order that the retiring owner can enjoy this favourable tax treatment the VIMBO transaction will require prior clearance from HMRC.

Paul Gilks, a Partner in Kerman & Co’s M&A team, who recently advised on a VIMBO transaction involving a family business said: “A VIMBO is potentially an extremely flexible transaction which can be tailored to the individual circumstances of each business.  For example, there is no requirement for the existing owner to end his involvement with business. Whilst he must sell a controlling interest in the business to Newco, he may retain a minority stake, or remain a non executive director or consultant to the business. Also the VIMBO transaction can be used as a means to incentivise non family members of the existing management team by giving them shares in Newco or can be used as a strategic opportunity to strengthen management by attracting a high quality new recruit to the management team.”

The retiring owner would normally require that the repayments of the loan notes are secured over the assets of the business. As a further protection, the loan notes themselves will provide that the loan note holder’s consent is required for major business decisions. In the event that the business runs into difficulties in the future and cannot repay the loan notes the owner therefore has the option to either enforce his security and reacquire 100 % of the business, or use the threat of enforcement to push through any necessary management changes needed to turnaround the business.

The loan notes therefore place the owner in a similar position to that which he would have enjoyed had he remained the 100% owner of the business. A VIMBO really is a case of having your cake and eating it!