RP case studies: Unquoted shares and a management buyout

Richard Mattison runs through a SSAS case study outlining how the vehicle can assist in a management buyout scenario

Sam founded Ammonite Electronics Ltd 30 years ago and took the business from a one-man band to 50 employees turning over £2.9m per annum.

Now aged 65 he is aiming at selling the business to his management team via a management buyout (MBO).

The company structure is a holding company with four subsidiary divisions. There are six directors in the management team and a one-off sale price of £3m has been agreed. Seeing this as an opportunity of a lifetime, the directors are very excited about completing the deal but need to find the cash.

The company’s bank has arranged a loan of £2,760,000 and funds are needed for the balance.

Each director has £200,000 in the company staff pension scheme which has built-up over the last ten years. Fortunately, their financial adviser has pointed out that a small self-administered scheme (SSAS) will provide the solution as it is permitted to invest in unquoted shares.

Up to a fifth

The basic rule is that a SSAS can invest up to 20% of its fund in the shares of sponsoring companies but no more than 5% in each. By combining the directors’ pension funds into a SSAS a fund of sufficient size can therefore be created.

The six directors form a SSAS with the four subsidiaries as participating companies. Their company pension contributions are redirected to the SSAS for the future. They also transfer-in their funds from the staff scheme giving an initial fund value of £1,200,000.

As the SSAS is permitted to invest 5% of its fund to purchase shares in each of the subsidiaries, this means that as part of the deal to purchase the company, the SSAS buys a proportion of each subsidiary for £60,000 (i.e. 5% of the fund), investing the total amount permitted of £240,000.

The required funds are now made available and the deal goes through as planned. Sam settles into a happy retirement while the six managing directors take ownership of the company.

The balance of the SSAS is invested in a platform account by the IFA. At some point the directors are considering using these funds to buy one of the company’s premises from their landlord who may retire in a few years. The rent will be used to further boost the value of their pension funds.

As is demonstrated here, the additional flexibility available from a SSAS makes it the ideal pension vehicle for company directors and business owners.

Richard Mattison is director Whitehall Group (UK)