What is a Vendor-initiated Management Buy-Out (VIMBO)?

Now more than ever, both management and owners find a VIMBO more attractive than a third-party sale, such as a Management Buy-In (MBI), or a takeover. This enables the business to be passed on to a management team with whom the owners are familiar, and can trust to continue the legacy of the company. This is particularly the case when a business owner wishes to realise capital in if they are operating in a climate with little third party M&A activity.

What are VIMBOs and how do they work?

VIMBOs are often misunderstood to be the same as MBOs (Management Buy-Outs). This is not the case. A management buy-out arises when the operating management team of a business approaches its owner(s) with the intention of buying. Contrarily, a vendor-initiated management buy-out is the process where the owner(s) of a firm approach the current management team with the intention to sell all or part of their business. 

Depending on the availability of finance, a management team can fund a VIMBO using an initial lump sum payment taken from the company’s cash resources, a bank loan, or by a Vendor Loan Note, using the company’s future profits to fund the remainder of the sales through deferred consideration. It is possible for an owner to retain a minority stake in the business or enter into a consultancy agreement with the business after a buy-out procedure has been completed. 

What are the benefits of a VIMBO?

• A company owner can initiate a deal on their own terms (if agreeable with the management team) with the option to immediately realise cash
• The owner is able to take control of the transaction process, alleviating pressure from the management team to enable them to focus on the day-to-day running of the Business
• There is potential for the management teams to utilise Vendor Loan Notes to pay with future profits of the Business and avoid borrowing from an external funder
• This can reduce financial risk to the Business, as the owner may be paid over a designated number of years so as not to put the business under immediate financial strain
• During the payment process, the owner may oversee the succession of the business to the management team, allowing the company to benefit from consistency and stability during the transition period
• This type of transaction allows an owner to reward current management and pass the Business on to individuals they have trusted to help run the Company to the point of exiting. This avoids faceless changes in management, or culture shock, things which can be caused by Management Buy-Ins and third-party takeovers.
• A VIMBO, structured correctly, entitles vendors to capital gains treatment which if eligible may entitle the vendor to business asset disposal (Capital Gains Tax) relief; this may allow the vendor to benefit from a 10% tax rate on the first £1m of sale proceeds – subject to clearance from HMRC.

Things to consider for a VIMBO?

Financing the VIMBO is a key consideration. In many cases, the management team wishing to buy may not be able to raise enough cash or capital to fund a VIMBO by themselves. This is especially the case when a vendor wishes to be paid immediately rather than in deferred payments. As a result, the management team may have to raise these funds by way of loan papers or debt funding. This debt may require levels of repayment which could hamper the growth of the Business, potentially making a VIMBO less attractive to the current management team. 

This can also affect the price achieved by the Vendor, as the agreed price may have to be fundable by the performance of the business. A strategic, third-party, acquirer may pay a greater price and have more funds readily available for a larger day one payment. The owners must weigh up the value of fund availability and selling price, against trust in the new owners to take the business in a preferred direction. 

Additionally, whilst the management team may be very skilled in their current role, they may not possess the range of skills required to run a business effectively. As such, the strength of the second-tier management is a serious consideration when considering a VIMBO. 

It is important to seek advice from a professional to assist in any issues arising such as calculating the value of a business, its level of available cash, or its ability to service debt. At PEM Corporate Finance, our team of M&A advisers are available to assist and advise on this process – Get in touch or give us a call on 01223 728222.