Maximising value from management incentive plans demands more than a safe harbour
January 21, 2019
Effective management incentive plans are critical in closing acquisitions and maximising deal value by driving desired behaviour and aligning objectives to the sponsor’s value creation plan. What’s on offer to existing management is clearly very important. An equal priority is the package needed to attract new personnel hired post completion to deliver the strategies for transformation.
So, what has put post completion management incentives in the spotlight?
With the changes to Entrepreneurs’ Relief in the October 2018 Budget, it is conceivable that more UK transactions may take place where management’s investment falls within the safe harbour provisions outlined in the BVCA 2003 Memorandum of Understanding (“MoU”).
On the face of it, this has some benefit as the MoU is a purely structural approach. The MoU provides comfort that the shares have been acquired at market value even if no valuation has been carried out.
Notwithstanding that it is normally difficult to fit complex buyout funding structures within all the various conditions needed to comply with the MoU, it is important to recognise that the MoU only applies to shares issued when the deal is completed. Anyone being brought in later to the management equity participation cannot benefit from the safe harbour provisions.
It is therefore conceivable that new joiners might have to pay more for their shares relative to the incumbent management team (even after a relatively short period after completion). This could deter high calibre talent from joining.
Importance of robust tax valuations
There are clear advantages for ensuring that the price paid by management at completion represents market value, as supported by a robust tax valuation, regardless of whether the conditions of the MoU are met or not. This would need to be the case for non-UK talent anyhow.
Don’t leave incentives to chance
Management incentives are a powerful deal value driver. The issues surrounding valuation are increasingly important. Upfront integrated commercial, tax and valuation advice can therefore make the difference between the incentives being a deal value maker or deal value breaker.
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