A return to form: why the stage might be set for more VIMBOs

How a changing financial landscape is impacting succession planning

With interest rates and the taxation landscape continuing to evolve, Chris Adlam, Matt Field and Dave Howes from our FRP Corporate Finance Norwich team explore why vendor-initiated management buyouts (VIMBOs) may see a surge in popularity in the years to come.

In recent years, business owners have tended to steer away from vendor-initiated management buyouts – or VIMBOs – when looking to exit their business.

But might the stage be set for them to make a comeback? Here, we explore what VIMBOs are, some of the historic challenges associated with them are, and why they might now prove to be an attractive option in exits.  

What is a VIMBO – and how have they been deployed?

Not to be confused with private equity backed management buyout (MBO), where a private equity house works alongside a management team to facilitate a buyout and grow a business towards a secondary transaction, VIMBOs typically use bank debt or deferred payment terms to fund an exit for an owner.

Business owners have historically had the same advantages for the business of a VIMBO as a sale to an Employee Ownership Trust (EOT) – a lack of disruption to the day-to-day running of their business, while retaining continuity and commitment of what is often a highly experienced team.

However, considerations around tax and cash have frequently made the VIMBO option unattractive to sellers.

When thinking about the tax advantages of options like an EOT vs. an MBO, attention often jumps first to the headline rate of CGT – where the 0% offered to qualifying EOT transactions is undoubtedly attractive.

But this isn’t the full picture. What owners have found most challenging when determining their exit strategy has been the relationship between the timing of the chargeable event for CGT purposes, the timing of when the CGT is paid, and the typical interest rates applied where the transaction is debt-funded.

In many MBO or EOT situations, although a price might be agreed for the shares being purchased, much of the consideration for those shares is payable on deferred terms. Where the sellers in a VIMBO transaction want certainty as to the rate of CGT payable on the capital gain they have realised, the consideration – typically where no external debt is provided – is reflected as simple unsecured debt.  This means CGT on the full chargeable consideration is payable on 31 January following the tax year of the transaction, regardless of the cash received from the purchaser by that date.  

For deals with a significant deferred element, this might typically mean that the tax payable on 31 January is broadly equal to the cash received up to that point.

A changing landscape

The timing of tax payments in relation to a VIMBO can be managed by using loan notes or redeemable preference shares, but only alongside uncertainty as to what CGT rate would apply to cash, when it is eventually released.

Ahead of last year’s Autumn Budget, most people only thought CGT rates would go one way – upwards – so this option was often dismissed.  And, with the main rate of CGT increasing to 24% from 30 October 2024, and the rate for qualifying Business Asset Disposal Relief (‘BADR’) claims also increasing to 18% from 6 April 2026, it might be reasonable to consider that MBO transactions are even less attractive than they have been in the years prior to 30 October 2024.  

Although this will remain true for many – and the tax analysis attaching to EOT transactions remains highly attractive – the current rates of CGT combined with reducing interest rates may facilitate improved cashflow and debt servicing costs.

This may make it slightly easier for advisers to fashion an MBO transaction, especially in situations where the selling shareholders find current rates of CGT palatable and believe the prospect of CGT rates increasing to be unlikely.

Where this is the case, rather than crystallising the full CGT liability upon completion of the transaction, a proportion of the value owed to the selling shareholders could instead be rolled into loan notes or redeemable preference shares.  This would mean that the CGT would be delayed until such time as the loan notes or preference shares are redeemed, helping with cashflow by delaying and matching the CGT payable to cash receipts in future tax years, such as at a time when CGT rates may not have increased, but external debt might be cheaper.

The road ahead

Although a volatile economic environment anything is far from certain, this landscape could lead to the greater use of VIMBOs in the near future.

If anything, the fact that this structure may have renewed value demonstrates the value of taking a detailed and diligent approach to not just exit strategy, but also corporate finance and tax planning.

Reviewing all options – even if they’re ultimately discounted – increases the chance of finding a solution that delivers the best possible outcome.