DMH Column

After a tough few years, many business owners are keen to move on with their lives. Sale or Private Equity (PE) can be the answer, but if your business is not in a “hot” sector, or the growth profile does not attract investors, what are the options?

Employee Ownership Trusts (EOTS)

These are becoming increasingly popular, replacing the more traditional management buyout.

Two main reasons these are popular:

(i) builds loyalty, giving employees a long-term ownership stake
(through an employee trust).

(ii) allows founder(s) to de-risk/exit, with zero rate Capital Gains Tax (CGT).

EOTs can use borrowed money, but are often financed with profits/cash reserves, combined with future profits (deferred consideration). A founder could sell 50% to an EOT, then if the business continues to grow, seek a full exit in due course. It is not certain though whether the currently attractive tax rate will survive an election.

The risk with an EOT is that it will often include an extended deferred consideration period; if the business slows down, or loses momentum, the company may be unable to pay. Whilst payment arrangements can be adjusted, this may be one reason for founders to retain a controlling interest, until they’re satisfied that the management team is ready to take the reins.

Management Buyouts (MBOS)

These are financed by a founder selling some/all shares to a key leadership team, with the price paid from retained profits/borrowing.

Founders will typically sell all/some shares, supported by bank debt, and sometimes a deferred payment. Key managers are normally asked to invest personally (‘skin in the game’), with the rule of thumb being one year’s salary.

Sellers will receive CGT tax relief, through Business Asset Disposal Relief (10% first £1m, and 20% thereafter). So, MBOs may be less attractive than an EOT from a CGT perspective, but achieving CGT treatment at these rates, remains much more attractive than the other options of extracting reserves from a business (as income).

In issues one and two of Corporate Commentary, I covered ‘Current Trends in the M&A Market’ and ‘Sale or PE? Which will Deliver Best Value?’, respectively. Both can be found at:


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