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,

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