If you are at the stage where you’re considering your succession planning or possible exit options, and company culture and employees are a top priority, it may be worth considering a Management Buyout (MBO) or an Employee Ownership Trust (EOT).
There are many benefits of succession planning ahead of a business owner’s or shareholder’s exit. Listed below is an overview of both exit options to provide essential exit route insight.
Management Buyout (MBO)
A Management Buyout (MBO) is the more commonly recognised exit option. This is the typical way for a management team to acquire the business from the current owners.
Typically, the ‘buyers’ include a small top team, with a deal leader, likely the CEO, and finance and sales professionals. This top team is important, as funders need to feel comfortable that the ‘NewCo’ will not be reliant on one person. That isn’t to say this team needs equal shareholding, but it must be clear how shares are to be divided. This should be in writing via a shareholder agreement.
It’s not usual for such teams to be awash with funds, so deals with the vendor to support the payout/buyout are common. This can be backed via Private Equity support (if the deal is big enough) but the equity must be shared, and debt if unencumbered assets are available (e.g., debtors and buildings).
There may be issues in agreeing on the company valuation. The buyout team may argue that they have created the value, to which the vendor could counter that this was simply part of their job. As this is an issue that must be approached sensitively, it is recommended to enlist the support of advisors who are well-informed about this possible challenge.
It should be noted that the vendor will pay Capital Gains Tax on all sale proceeds, whether they are deferred or not. However, the good news is that the company’s values, DNA and team stay intact. Additionally, funders hold MBO teams in high regard, as they are seen as safe hands for the future of the business.
Employee Ownership Trust (EOT)
In an EOT, the vendor agrees to transfer a minimum of 51% of the shares in their business to a Trust. The trust holds the shares for the benefit of all qualifying employees.
Qualifying beneficiaries depend on one or more of the following categories as defined by the company’s directors. This differs from business to business, as each company sets its own criteria:
- Length of service
- Hours worked
- Total remuneration
When establishing the Trust, it must have a board of directors. This must include an employee representative and an independent director- the vendor is also allowed a seat on the board.
The company’s value needs to be revenue-approved, and there must be a valid reason for establishing the EOT. Once HMRC approval is gained, a decision needs to be made on how the agreed consideration will be paid. Most often, this involves a vendor loan, possibly more support, and, if agreed, some borrowing against the company’s assets.
An added and significant advantage is that the vendor takes all proceeds free of Capital Gains Tax. The Trust’s beneficiaries can be paid up to £3,600 per year in tax-free bonuses.
Whilst the beneficiaries are treated equally, barring the set Trust criteria, for qualifying companies, an EMI scheme can sit side by side with this process. This can provide added value to senior management.
Unlike an MBO, an EOT does not require payment from any beneficiary for the share in the trust.
Ready to Consider Your Exit Options?
Despite their differences, Management Buyouts and Employee Ownership Trusts offer viable exit options. Both routes ensure succession planning prioritises the business’s DNA.
To choose the exit option that is the right strategic fit for your company, consider what you want to prioritise. It is strongly recommended that you consult with advisors to determine the best path forward for a successful exit.
Want to discuss your succession planning further? To discuss which option may be right for you, please get in touch.