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Praxisbericht und Vortrag von
Management Buy Out
How do I handle an MBO – Practical experiences
Dr. Thomas Pultar, CEO of Biomeva GmbH
Hans-Joachim Philipp, Bachelor of Commerce, tax accountant/CPA
WISTA AG partner
&
Management Buy Out
Motivation Factors from the Buyer‘s Perspective
• Independence– Gaining decision-making freedom– Entrepreneurial thinking
• Financial opportunities
Management Buy Out
From the Idea to the Implementation
• Financing planning and recommendations for an optimal financing structure
• Financing partners• Optimal tax concepts• Legal advice
– Confidentiality agreements– Letters of intent– Credit and security agreements– Purchase agreements
Management Buy Out
LBO = Leverage Buy-Out
Company purchase using a highProportion of borrowed capital/
debt reduction using future cashflow from the target company
MBO = Management Buy-Out
Internal management acts as (co-) purchaser of the company
MBI = Management Buy-In
External management acts as (co-) Purchaser of the company
Markets
- Corporate succession in family-operated companies- Corporate subsidiaries (spin-off/restructuring)
Private limited company(e.g., GmbH & Co. KG)
• No material differences between SD and AD from the perspective of commercial law
• From the standpoint of civil law, an SD is more easily structured. => SDs regularly employed for private limited companies
Individual enterprise
• Only an asset deal is possible
Management Buy Out
Target company
Corporation
Share Deal (SD)
• Share purchase
Asset Deal (AD)
• Purchase of individual assets
Coflict of interest betweenBuyer and seller for taxationreasons
Management Buy Out
ShareDeal
AssetDeal
Seller Buyer
•Corp: 95 % exempt from capital gains tax and tax on profit
•Sole proprietor: Only 50 % exempt fro tax on profit; income tax due
•No depreciation potential
•Finance costs can be fully deducted in the case of corporations, but only 50 % for sole proprietors
•Fully taxable at the corp. level. Subject to capital gains tax (approx 16 %) and tax on profit (25 % plus 5,5 % solidarity contribution)
• Upon profit distribution to the partners (legal individuals) again subject to 50 % income tax
•Depreciation potential
•Finance costs can be deducted
Impractical
Practical Impractical
Practical
• Calculation and distribution of the seller‘s tax advantage• Purchase of shares in TargetCo GmbH by a NewCo GmbH; profit-and-loss transfer agreement
(EAV) between TargetCo GmbH and NewCo GmbH => Finance costs fully deductible.
TargetCo GmbH
A B C
Management
Finance costs are 100 % deductible.
NewCo GmbH
Purchase business shares
EAV
Bank
Finance costs
Characteristics of NewCo GmbH:
- Established with equity capital
- Bank provides loans directly to NewCo
- Thanks to EAV no tax-free income from investments, but instead, the
TargetCo results are offset against the interest expenditures of NewCo GmbH
Taxable entity
Management Buy Out
Loan
However: The boundary between Shareholder/third party financing must be observed (§ 8a of the capital gains tax code)
Exemption limit: € 250,000Changes are being planned!
Management Buy Out
Preparation MBO-strategy,offer
Letter of Intent Due diligenceexaminations
Closing
• Feasibility examination
• Preparation of a business plan (3-5 years)
• Company valuation
• Analysis and preparation of the MBO structure (from buyer or sellers
• Offer
• Defining the transaction structure
• Financing discussions
• LOI
• Due diligence (legal, tax, finance)
• Preparation of the final financing
• Contract preparation
• Final contractual negotiations
• Closing: transaction concluded
~ 2 months ~ 1 month 1-2 months 1-2 months 1 month
• Principle decision (management, private equity partner)
• Indicative offer• Exclusivity agreement with partners board (time limited)
• Binding offer
• Contracts • Closing
Management Buy Out
Seller
Dr. Thomas PultarBIOMEVA GmbH & Co. KG investor company
(private investors)
BIOMEVA Holding GmbHHeidelberg
(new firm)
BIOMEVA GmbH,Heidelberg
Deutsche Bank,Seller loans and
MBG
Outsidecapital
Purchase price
Equity capital and loans
$
Example
Parameters: Seller is an individual Equity capital/share purchase costs: € 2 million
Company value/purchase price: € 10 millionLiabilities: € 10 million (are assumed)
ASSET finacial Current market Undisclosed statement value reserves
Residual ND €x1,000 €x1,000 €x1,000 Years
company 0 1,500 1,500 15
Land 2,000 3,750 1,750
Buildings 2,000 4,250 2,250 15
Misc. fixed assets 1,000 2,000 1,000 5
Stocks 4,500 6,000 1,500 1
Misc. Current Assets 2,500 2,500 0
12,000 20,000 8,000
Results Overview
Seller
€x1,000
BuyerTax savings through utilizationof the depreciation potential €x1,000Purchase of a GmbH &
Co. KG (private limitedCompany/sole proprietorship
Share deal for a GmbH (corp.)
Asset Deal for a GmbH (corp.)
Taxes: 2,569 Taxes: ./. 2,882
Taxes: 1.772
Taxes: 4,180
(optimal)
Modelfor taxoptimization
Income: 7.431
Income: 8.228
Income: 5,820
Net purchase price: 7,118
Net purchase price: 10,000
Net purchaseprice: 7,584
Taxes: ./. 0
Taxes: ./. 2,416
(optimal)
Models to Optimize Company Purchases
Objective: To achieve the tax advantages of the purchase of a GmbH & Co. KG for a share deal
Oldermodels Description Assesment
Combination model
Joint venture model
Conversion model I(purchaser model)
After share purchase, the sellerCarries out the asset deal througha 2nd company by himself withsubsequent profit distribution
Further development of the GmbH bythe buyer into a GmbH & Co. KG afterpurchase
Transformation of the GmbH by thebuyer into a GmbH & Co. KG afterpurchase
Earned income taxcannot be avoided;changes in 2001 taxreform
Avoids the earned income disadvantage;however, elimiantedin 2001
Also eliminated by the 2001 tax reform
Models to Optimize Company Purchases
Newer models Description Assessment
Consolidation model
Downstream merger
Share purchase by a newGmbH & Co. KG, conclusion ofan EAV, asset deal
Share purchase by a subsidiary,transformation of the targetcompany into a private limitedcompany, merger of both companies
Eliminated by the corporate tax develop-ment law
High risk since it isvery controversial
Conversion model II(distribution model)
Transformation of the GmbHinto a GmbH & Co. KG prior tosale
Doable, but less than optimal for the seller(note the 5-year waitingperiod)
1. Purchase of shares by a NewCo (GmbH) to shield against civil risks (liability!) to the greatest possible extent.
2. Have a NewCo be responsible for outside financing and conclude a profit-loss-transfer agreement at the time of purchasing shares in the corporate (GmbH) (costs for outside financing are fully deductible).
3. Asset deal when purchasing a company which is registered as a corporation (GmbH) is only practical where losses can be adequately carried forward for tax purposes.
4. Purchase of a private limited company should always be in the form of a share deal.
5. Utilize the conversion model for the seller, provided the five-year waiting periodcan be maintained.
6. If the seller is a sole proprietor, purchase price installments may be able to be negotiated.
Structuring Recommendations