When we carry out strategic exit planning with clients, they often already have a good idea of which way they want to go and on occasions are very fixed on that route, for all manner of reasons.
Part of our role is to take a step back with the clients to consider all the options, and ultimately it may be the same final exit route, but it needs to be with the benefit of a full understanding of the options and the pros and cons and associated risks.
Generally, an exit by selling to trade is most understood by clients, but the pros and cons and differences between Employee Ownership Trusts (EOTs) and Management Buy Outs (MBOs) is usually where the understanding is less. Therefore, this article focuses on the pros and cons for a seller of looking at an EOT or an MBO.
The following represents some of the considerations to take into account when considering the options:
Highest Sales Value
When considering what route is likely to achieve the highest sales value (acknowledging that might not always be the key consideration from the owners), usually it is in this order:
1 – Trade Sales
2 – Management Buy Out
3 – Employee Ownership Trust
A sale to trade on most occasions will result in the highest price, especially if there are multiple bidders. This is usually followed by an MBO and then an EOT. One of the main reasons for this is that for an MBO, the payment structure allows for the business to use its cash, borrow money and take on private equity, whereas an EOT can only really use cash and borrowing to reach a figure.
Share Sale
Usually with an MBO, the sellers fully exit and whilst there may be some deferred element to their deal, the new management team and possibly investors will usually own all the shares moving forward. With an EOT, the seller has to sell a minimum of 51% to the trust, but assuming they do not sell 100%, they still retain a shareholding and involvement in the business going forward, which is very different to an MBO.
Payment Options
With an MBO, the sellers will receive the bulk of the consideration on the day of completion for the sale of all their shares. This money will come from a combination of cash from the business, borrowing, investment from the management team and third-party investors. With an EOT, some money is paid at completion which could come from cash and or borrowing, but there is likely to be a deferred element and of course there are still the remainder of the shares to be sold at a future date, when the business can afford to pay for the rest of the shares.
Speed
As the seller remains involved moving forward, an EOT should be quicker than an MBO as an MBO deal might require funding from a number of parties and external due diligence carried out.
Tax efficiency for the seller
This is where the EOT is currently well in the lead. For an EOT there is 0% Capital Gains for the shares sold to the EOT, whereas for an MBO the Business Asset Disposal Relief Scheme (BADR) will feature which from April 2025 will lead to a 14% tax charge on the first £1m (lifetime allowance) and then 18% or 24% above this. The 14% BADR will increase to 18% from April 2026 as well. It may be that the 0% for EOT changes at some point but at the time of writing, it remains 0% and an obvious benefit.
Legacy & Culture
This is often levied as a key consideration in favour of an EOT more so than an MBO. It is true that an MBO passes the ownership to a management team, rather than all the employees, but in reality the EOT still has a trust consisting of trustees who manage the business on behalf of the employees, so I personally don’t see a huge difference/benefit of one over the other for employees. There is however a tax-free bonus that employees can receive via an EOT of up to £3.6k.
Management Team v Trust
One question to be considered is whether the management team actually want to take this step of becoming owners. It is a very different situation to go from an employee to a part-owner and it is likely the management team will need to invest their own cash in the deal, and in many instances borrow money personally in order to do this. With an EOT, a group of Trustees will manage the business on behalf of the employees and this group will act like a board of directors. It will include as a minimum representations of the employees, an independent trustee and the seller (given they still own a proportion of the shares).
These are just a number of the considerations to be thought about as ultimately the choice between an MBO and EOT impacts how a seller exits, when they finally exit, how much they are paid, and to some extent their legacy going forward.
If you would like to discuss the options of an MBO, EOT or a Trade Sale, please get in touch as we have considerable experience in each area.
