Alvarez & Marsal Advises on Management Equity Plan Readiness for Company Exits
Alvarez & Marsal has released guidance for companies anticipating an exit, emphasizing the critical need for properly structured and documented Management Equity Plans (MEPs) to avoid adverse tax consequences during due diligence.
Consultancy firm Alvarez & Marsal has issued guidance for companies planning an exit, highlighting the importance of assessing Management Equity Plans (MEPs) ahead of potential sales or IPOs. The firm warns that inadequate preparation of these incentive schemes can lead to significant tax liabilities upon transaction.
MEPs are commonly used to align management's interests with shareholders and drive business growth. These can range from simple share issuances to more complex arrangements like stock options or 'growth shares.' The UK's tax legislation provides a framework that can enhance the incentive impact if plans are structured correctly.
According to Alvarez & Marsal, errors in the design and implementation of MEPs can result in a substantial portion of exit proceeds being subject to income tax and National Insurance Contributions (NIC), rates significantly higher than capital gains tax.
The consultancy identifies key areas for review: the presence and proper execution of Section 431 elections (which ensure capital gains treatment), clarity on share valuations at the time of acquisition, and the correct calculation of fair market value for departing employees. Alvarez & Marsal recommends conducting a pre-transaction 'health check' of MEPs well in advance of a formal sale process.