Encounter the Difference

NZ CA is an association of independent Chartered Accounting firms, proactively working together for the benefit of our clients.

BUSINESS SUCCESSION PLANNING

Published: 3rd December 2018

Author: Anonymous

Published in: TrialBalance December 2018 Issue 65

Management Buy-outs and Selling Shares to employees

Succession planning is an essential consideration for all businesses, especially where the owner is considering exiting from the business within the next 5 years. When the owner of a privately held business is looking to move on, there are several succession planning options that they may choose to take. Generally, the owner will approach a business broker and sell to an unknown third party; or perhaps they will contact others in their industry to see if a competitor wishes to buy them out. Alternatively, they may choose to sell to someone already working in the business, through either Management Buy-Out (MBO) or the sale of shares to existing employees.

Below we will discuss both Management Buy-Out (MBO) and the sale of shares to employees as succession planning approaches, and look at the importance of structuring them correctly to protect the owner’s interests.

Management Buy-Out (MBO)

One option for a business owner is to sell their company to one of the business’ existing management team or other senior employees. If one or more of the managers or other senior employees buys the business, this is often referred to as a Management Buy-Out (MBO). The advantage of an MBO is that the owner will be selling to people that they have confidence in. The buyer will most likely already have relationships with customers, suppliers and staff which can make the transition much

smoother. Owners often build up a business over many years and genuinely care about their customers, staff and others that they have a business relationship with. The owner will most likely know the buyer well and have confidence that that person will know these parties and be able to continue to nurture and develop these existing relationships.

To make the transition to new ownership smoother, the current owner will often agree to provide support to the buyer, usually by contracting to provide services back to the company for a fixed period of time.

Share sale to employees

Another succession planning option is to sell just some of the shares in the company to an existing, usually senior employee, and for the owner to retain the majority of the shares in the company. Then over time, the remainder of shares can be transferred to the buyer. The right to buy further shares can be based on financial or other targets set by the purchaser, or the company as a whole. An advantage of selling to an employee is bringing in someone, generally younger, with enthusiasm to run the business. They are then able to increase the value of the business with new ideas and hard work and the existing owner benefits because they still hold the majority of the company’s shares.

Structuring the transaction to protect the owner’s interests:

In either a full sale by MBO or sale of only part of the company to an employee, it is possible for the owner to let the purchaser pay off the shares they have purchased over a period. This is referred to as “vendor finance” because the seller of the shares (the vendor) is effectively providing finance to the purchaser until the shares have been paid for in full. An advantage of vendor finance is that it can enable a purchaser who otherwise may not be able to afford to buy shares in the company (e.g., because they have recently financed a house purchase) to participate in the transaction. Vendor finance is often provided in conjunction with some bank funding which enables the owner to receive a portion of the purchase price (the bank-funded part) immediately at the time of the share sale

When vendor finance is provided, it is usual for the owner of the shares to take security over those shares until they have been fully paid for. This means if the purchaser of the shares were to default on their payments, the owner would have the ability to take back the shares. The security can then be registered on the Personal Property Securities Register to give the owner priority over subsequent secured parties.

If shares are sold to an employee, and the owner is retaining an interest, it will be vital that a Shareholders’ Agreement is prepared to set out the rights and obligations of both parties. This may include things such as:

• matters that require the approval of all shareholders;

• what happens if a shareholder gets sick or dies;

Related Articles

  • Auckland
  • Bay of Plenty
  • Canterbury
  • East Coast
  • Hawke's Bay
  • Manawatu/Wanganui
  • Nelson/Marlborough
  • Northland
  • Otago
  • Southland
  • Taranaki
  • Waikato
  • Wairarapa
  • Wellington
  • West Coast

RSM New Zealand Group

RSM consists of three New Zealand member firms of the global international audit, tax and consulting group - RSM. RSM is represented by three local, long standing firms in New Zealand, RSM New Zealand (Auckland) Limited and RSM New Zealand (Auckland North) Limited and specialist audit and assurance firm RSM Hayes Audit. The legacy of the representative firms spans over 70 years in Auckland and offer local knowledge and worldwide connections which allow us to provide the best possible resources for our clients.

RSM provides a full range of accounting and advisory services and we are committed to helping you grow your business. As well as what you would expect from your accountant, we also provide specialist services in Audit, Tax and Business Consultancy to clients across a diversity of industry sectors.

As a firm we provide strong service benefits to our clients. Our simple structure enhances business efficiencies and underpins our client focused culture, ensuring ready access to our partners and senior team members.

We seek to bring you the best of both worlds. Expert local experience combined with the sixth largest international accounting network of independent audit, tax and advisory firms.

Region: Auckland

Phone: 0800 774 623

Focus Chartered Accountants

At Focus we believe that the Chartered Accountant of today is judged by the way in which they work with their clients to provide creative and creditable solutions to their business needs.  To do this successfully they must be a proactive member of their clients' business teams, and be prepared to dissolve the boundaries and limitations of traditional accounting work and thinking.

Region: Bay of Plenty

Phone: 0800 362 872

Midgley Partners Limited

A boutique firm Midgley Partners are as particular as the clients and assignments they select. Continuely looking to secure clients who can demonstrate a desire to improve their understanding of their business, therefore grow their business and profits and improve their quality of life.

Midgley's have a great team of accountants and would like to get to know you and your business to help you and your business achieve your goals.

Region: Canterbury

Phone: 03 365 6900

No firms in East Coast

NZ CA Limited

Region: Hawke's Bay

Phone: 06 835 5299

Naylor Lawrence

Region: Manawatu/Wanganui

Phone: 06 357 0640

Wallace Diack Chartered Accountants Ltd

Region: Nelson/Marlborough

Phone: (03) 578 7389

Sudburys Limited

Sudburys look after business owners providing solutions in all areas related to accounting, finance and wealth management. They work alongside their clients, from supporting them with their daily accounting needs, to providing them with valued business advice.

Region: Northland

Phone: (09) 430 4888

G S McLauchlan & Co

GSM is a Dunedin based Business Advisory and Chartered Accountancy practice founded in 1957. 

GSM pride themselves on our specialist knowledge, our ability to keep fresh in today's ever changing environment

Region: Otago

Phone: 03 477 8192

McIntyre Dick & Partners Limited

McIntyre Dick & Partners Ltd is one of the top chartered accountancy and business advisory firms in Invercargill and with a diverse portfolio of clients throughout the south including Invercargill, Te Anau, Gore, Queenstown, Dunedin & throughout Otago.

Region: Southland

Phone: 03 211 0801

Harris Taylor Limited

The Accountancy world is constantly changing and highly competitive. At Harris Taylor their challenge is to stay ahead of the competition by providing the best possible service, whilst ensuring that client satisfaction remains our primary motivation and ultimate goal.

Region: Taranaki

Phone: 06 278 5058

Vazey Child Limited


The first thing you will notice when you work with Vazey Child is their approach. It is in the analysis and advice, the understanding of your business and a focus on adding value that is where they excel. It’s why they exist, and it’s why their clients enjoy working with them.

Region: Waikato

Phone: (07) 838 2169

Southey Sayer

Offering a full range of accounting and business development services, tailored to meet the needs of each individual client. The wide range of expertise and experience within the firm is shared amongst the partners and their teams for their clients benefit. Services and products offered are fully flexible there will be no expectation to conform to a certain product or pricing structure.

Region: Wairarapa

Phone: (06) 370 0811

Gambitsis Crombie Limited

Gambitsis Crombie can trace its history back to 1966. Over the years it has undergone several name changes and based itself at several locations around the Hutt Valley. With all the changes over the space of forty plus years Gambitsis Crombie has always retained the fundamental principles of honesty and integrity.

Region: Wellington

Phone: 04 939 1975

Marshall & Heaphy Limited

Central to the culture of the team that has been developed over their history, is the belief that successful and sustainable businesses are the backbone for the West Coast community. Great businesses create jobs, keeping people and family together on the Coast, building a sustainable community.

Region: West Coast

Phone: 03 768 7186