Asset Based Lending -

Demand for Management Buyouts and Buy-ins surges as Capital Gains Tax reforms loom large

Growing speculation of a Capital Gains Tax hike is having a significant impact on the dynamics of the UK’s M&A market. With business owners looking to exit earlier than planned, we look at why MBOs and MBIs are chosen as exit strategies while highlighting the use of asset-based lending (ABL).

Published

10th December 2020

Category

Arbuthnot Commercial Asset Based Lending

Chancellor Rishi Sunak is considering a major squeeze on Capital Gains Tax (CGT) as he searches for new ways to meet the £394bn cost of coping with the fallout from the Coronavirus pandemic.

In November, the Chancellor asked the Office of Tax Simplification (OTS) to conduct a report on CGT rates in comparison with other taxes. Growing speculation about this review has sparked an immediate reaction from business owners, a number of whom are now actively looking to sell up earlier than planned.

There is much uncertainty, as the rate of CGT could increase significantly if the Chancellor decides to harmonise it with rates of income tax. Directors or shareholders planning to sell, could end up paying 45% tax on business sale proceeds, rather than the current rate of up to 20%. It is also unclear whether Business Asset Disposal Relief (Entrepreneurs’ Relief), which currently provides a reduced rate of CGT of 10% up to £1m, will be scrapped as a result of this review.

Management Buyouts (MBO) and Management Buy-Ins (MBI) emerge as leading funding options

The potential overhaul of CGT is having a significant impact on the dynamics of the UK’s M&A market. There is increasing demand from business owners wishing to accelerate the sale of their businesses, rather than run the risk of facing a substantially higher tax bill.

In order to crystallise years of investment and protect their retirement funds, more and more business owners are now looking to MBOs and MBIs as comparatively quick and straightforward routes to exit, with the key advantage of a committed buyer. MBOs and MBIs also present an ideal opportunity for businesses operating in a highly technical field or a niche market to achieve a sale, where there may be fewer potential buyers.

Private Equity puts dry powder to work

Frequently sponsored by private equity investors keen to deploy large pools of capital for the right opportunities, MBO and MBI transactions can prove highly attractive for all parties involved. They offer the potential for the smooth continuation of the business as it transfers to people who have helped to build it to its current stage, or seasoned management teams who have specialist industry knowledge and expertise to take the business to the next level of growth.

Asset-based lending – the funding enabler for event-driven deals

The advantages of using asset-based lending (ABL) to fund an MBO or MBI structure are considerable. ABL finances the long-term working capital of the company, ensuring maximum retention of equity in the hands of the management team. It also provides optimal working capital headroom to fund the day-to-day cash flow, post transaction. ABL provides a further key advantage - speed. In both MBO and MBI situations, decision-making windows can open and close rapidly with ABL facilities structured quickly to tight timeframes with the right team.

To discuss opportunities for business owners to realise value through an MBO or MBI please contact Arbuthnot Commercial ABL at ABL@arbuthnot.co.uk.


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Registered in England and Wales no. 10915339. Arbuthnot Commercial Asset Based Lending Limited’s registered office is Arbuthnot House, 7 Wilson Street, London, EC2M 2SN. Arbuthnot Commercial Asset Based Lending is not authorised and regulated by the Financial Conduct Authority.

 

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