EOT (Employee Ownership Trusts)
Increasingly popular, replacing the more traditional management buyout. Two main reasons these are popular:
- builds loyalty, giving employees a long-term ownership stake (through an employee trust).
- allows founder(s) to de-risk/exit, with zero rate Capital Gains Tax (CGT).
EOT’s 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 satisfied that the management team is ready to take the reins.
MBO (Management Buyouts)
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, MBO’s 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).
If you would like to discuss any of these themes further, please get in touch:
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