A Management Buyout is a special type of business transaction where the existing management team acquires the company from its existing owner. It enables employees in leadership positions to gain control of a business that they already have familiarity and experience running; an attractive prospect for all parties involved.

MBOs can occur for many reasons, often resulting from an owner’s retirement plans. They can also result from corporate divestitures, private equity firms offloading assets, and efforts to turn around a period of financial distress/underperformance.

The key to a successful MBO is its structure, which helps ensure a smooth transition of ownership that benefits everyone.

A key component of the MBO structure is the “Newco”. This will be a new concept to people looking into the possibility of an MBO; in this blog, I’ll explain what it’s all about.

What is a Newco?

A Newco is a “New Company” that is formed for the sole purposes of enabling a transaction like an MBO. It is typically a limited liability company, acting as a blank slate.

The Newco has no historical baggage, such as liabilities or other commitments. It is lean, and optimised for its sole purpose.

It is, in effect, the official buyer in the transaction, while the MBO team owns the Newco.

Why not just buy the company directly?

As part of an MBO, the buyers could buy the shares themselves. However, this is not often recommended due to various strategic benefits associated with the Newco route.

• The Newco has no legacy debts or liabilities, and a clean financial record.
• It has a clear and simple ownership structure, which helps when issuing new shares or splitting equity.
• It contains financial and legal risk, keeping these away from the management team’s personal assets or those of the business.
• It also simplifies the process of transferring assets/shares, particularly with regards to tax.

The benefits of using a Newco for an MBO

Below is some further information about the benefits of a Newco as part of an MBO deal structure.

Financial risk management

The Newco insulates risk. When buying a business, you’re buying its problems too, such as debt, litigation or bad contracts. A Newco allows you to contain and manage transactional risks. If something goes wrong with the deal, creditors and claimants will target the Newco, not the MBO team personally (providing limited liability is in place).

Debt leveraged financing

Most MBO transactions are financed through borrowing (known as a Leveraged Buyout / LBO). The Newco has no prior obligations, which simplifies lenders’ risk assessments – lenders like clean entities. New shareholders and investors can also come aboard without needing to deal with legacy complications.

Liability shielding

The Newco acts as a corporate firewall, ensuring pre-existing legal issues, tax problems or contracts from the seller’s company don’t carry over. With a Newco, rather than buying the company directly and inheriting these issues, the liabilities will remain with the old company (unless assumed during the transaction).

Tax efficiency

A Newco is a powerful tax planning tool for an MBO transaction. Depending upon specific details and the structure of the sale, significant tax savings might be available, including:

• Tax deductible interest: Newco will take on debt to finance the acquisition, and the interest payments on this are tax deductible.
• CGT Planning: Capital Gains Tax is an important consideration for any owners of significant assets. A Newco can enable the seller to structure the deal to benefit from capital gains treatment.

Attractive to lenders and investors

Newco is a clean, focused entity that is purpose-built for growth; this is particularly attractive to investors. It avoids confusion of past investors or unusual shareholder arrangements. It also has a defined purpose that aligns with investor mandates.

Lenders also dislike uncertainty. When providing capital for an MBO, lenders see value in the Newco’s lack of previous liabilities or operational surprises. This can ultimately make credit underwriting faster and less risky.

Equity structuring and ownership

How do you divide ownership among managers, investors, founders, and maybe even employees? If you're dealing with a legacy company, this can become very difficult to manage.

With a Newco, you have no legacy shareholders and can build stock option pools, vesting schedules, and profit-sharing plans tailored to your goals.

You can issue preferred shares or other instruments that give investors downside protection while still incentivising the management team.

Potential issues with using a Newco

Despite numerous benefits (Newco is the most popular tool for an MBO because of these), there are some potential drawbacks that must be considered by MBO teams and sellers alike.

• There will be various legal complexities and set up costs associated with the deal, and solicitors, tax advisors, accountants and securities experts may need to be consulted.
• A Newco can sometimes mean a new bank account, accounting system, payroll structure, and more. This operational reset can be time-consuming and create temporary friction.
• Transferring contracts and licenses to a Newco isn’t always seamless. Some vendors or government agencies may not automatically accept a new entity without fresh approval or negotiation.

When might a direct purchase MBO be better than the Newco route?

There are some instances where a direct purchase may be better than using a Newco for an MBO.

• If the transaction is relatively straightforward and doesn’t require complex financing or liability protection.
• If the management team can fund the buyout outright (not often the case)
• If the business has valuable tax attributed which would be lost in a Newco structure
• If regulatory and contractual continuity is particularly important (such as in highly regulated industries).

Overall, a direct purchase may be more suitable when the goal is a simple ownership transition with minimal complexity. A Newco is generally recommended for any leveraged buyouts, or if liabilities need to be isolated.

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We have worked with several ambitious management teams embarking on a Management Buyout and have a lot of experience dealing with the various complexities the route presents.

Our goal is to ensure your deal is successful and beneficial to all parties involved, so send us a message if there is any aspect of your MBO plans that you need assistance with.