Employee Ownership Trust or Management Buyout – Which is right for your business?

However dedicated you are to your business, there’ll probably come a time when you feel ready to move on. This requires careful planning if you want the best outcome for you, your firm, and your employees.

If you’ve spent years building up a strong team who knows your business inside out, an internal sale might feel like a perfect fit.

What’s more, with the FCA’s consolidation review pending, internal exits may become increasingly popular.

According to Money Marketing, the review could be a “wake-up call” for buyers and sellers of regulated firms who will likely face greater scrutiny of any acquisition and consolidation activity.

So, with this in mind, let’s take a closer look at the two most popular methods of internal succession – Employee Ownership Trusts (EOT) and Management Buyouts (MBO) – to help you decide which might be the right fit for your business.

An Employee Ownership Trust gives your team a controlling interest in your business

An EOT could allow you to reward all the hard work your awesome team have done over the years by giving them a slice of the pie while maintaining your legacy.

The way it works is that you sell at least 51% of the firm’s shares to a trust fund – an EOT. You might choose to retain some involvement, but the trust must hold the controlling interest.

The shares in the EOT are then managed by trustees on behalf of your employees, who become indirect company owners.

Pros of Employee Ownership Trusts

• Tax advantages for you and your employees – You won’t usually be liable for Capital Gains Tax (CGT) on any shares you sell to an EOT and your employees can receive annual tax-free bonuses of up to £3,600. What’s more, the recent government Budget has given businesses greater flexibility to tailor annual bonuses to their needs by allowing for the exclusion of directors.
• A lasting legacy – Giving your employees a stake in your firm’s success could help to secure the long-term future of the business.
• Improved employee retention and attraction – Your team may be more productive and loyal if they know that they will directly benefit from the firm’s success.
• A seamless transition – You know exactly who you’re selling to and that they understand your business. So, you can sidestep the stress of searching for an external buyer who fits the bill.

Cons of Employee Ownership Trusts

• You might not qualify for CGT relief – The criteria for qualifying for CGT-free payments were tightened in the Budget. For example, the EOT trustee must now be resident in the UK.
• Your CGT relief could be recovered in the future – The CGT relief on the sale of your company to an EOT can be recovered if the business is later sold or if you breach the terms of the EOT within the “vendor clawback period”. This was extended from two to four years post-sale in the Budget.
• An EOT could put your business into a “straitjacket” – Shared ownership and the involvement of trustees could complicate the decision-making process and make it harder to achieve desired business growth.
• You might have to wait for your payment – Unless your employees raise third-party finance, it’s likely that payment for your shares will be deferred, potentially over several years.

A Management Buyout allows your leadership team to buy your business from you

An MBO allows you to sell your shares to the management team. They can take part or full ownership and control over the business.

As with EOTs, there are both pros and cons to consider…

Pros of Management Buyouts

• They provide a clean break – By passing full ownership of the business to your team, new management can come through more quickly and you’re free to move on to your next venture.
• There’s a strong leadership team in place – Your managers know your firm inside out and a clear leadership structure could streamline the decision-making process and boost growth.
• You might receive payment more quickly – Whether you’re retiring or moving on to other business interests, you’re probably keen to have the proceeds of your sale in your hands as soon as possible. An MBO could mean that you receive payment from the sale of your business more quickly than you might with an EOT.
• Flexibility – You can shape the structure of your MBO according to the specific needs of the business and your objectives. This flexibility could be particularly helpful in terms of the financial arrangements of the deal.

Cons of Management Buyouts

• There’s usually CGT to pay – You could be liable for CGT when you sell your company shares in an MBO. You might be able to reduce the rate of CGT you pay on qualifying profits by claiming Business Asset Disposal Relief (BADR). However, this is becoming less generous as the current rate of 10% will increase to 14% from 6 April 2025, and to 18% from 6 April 2026.
• Your business might be resold – As MBOs typically rely heavily on third-party loans, managers may start thinking of their exit once these are paid off. This means the potential for long-term growth and a lasting legacy could be limited.

As you can see, there’s plenty to think about!

Melo can help you find an exit strategy that meets your unique needs

Ultimately, there’s no one-size-fits-all approach to exiting a business. As you have read, both MBOs and EOTs have potential plus points and drawbacks.

And that’s not to mention all the options for external sales that could deliver just what you’re looking for.

If all this choice feels a little overwhelming, we can help. As a team, we have years of experience owning and selling businesses.

So, let us work our Melo magic to ensure this watershed moment in your life is one you look back on with fond memories.

Get in touch

If you’re ready to start planning your exit strategy, we can help you explore both internal and external routes to sale.

Drop us an email at hello@melo.co.uk or call us for a chat on 0113 4656 111.