The Semi-New Kid on The Bloc: Employee Ownership Sales Vs The Traditional MBO
An Employee Ownership sale involves the sale of a minimum of 51% of your business to your staff through a Trust structure, whilst a Management Buy-Out (MBO) is where your company’s management team purchases the business themselves – not through a Trust.
So, why would you choose an Employee Ownership Trust (“EOT”) sale over the more traditional MBO?
The 11 Key Advantages of An Employee Ownership Sale Over An MBO:
- With an EOT the tax breaks are significant. At the time of writing, the sale of shares in an MBO are subject to 20% Capital Gains Tax (“CGT”) on amounts above £1 million whilst an Employee Ownership Sale attract 0% CGT.
- Employee Ownership Sales are vendor-led, giving the seller more control over the process. This allows the vendor and their advisors to set the agenda, the timescale and, to a greater extent the business’s value, subject to HMRC clearance.
- An Employee Ownership Sale does not require managers to take the risk and personal debt of buying the business. Indeed, managers may lack the experience and competence to instigate a buy-out and fully run the business. An EOT enables the seller to stay involved and ensures a gradual transition and handover with succession and managerial experience being built over time.
- MBOs tend to be highly leveraged with third-party debt. This is understandable as the exiting business owners want their value upfront since they are no longer involved in the running of the business. The incurring of debt puts stress on both the business and the managers with banks being highly commercial in ensuring that repayments are met. Under EOT structures, with sellers staying involved for an agreed period, they are typically more prepared to have a higher vendor loan, which reduces the stress of third-party debt.
- Interest is charged on the vendor loans which can be attractive to sellers who do not need the money upfront. Typically, repayments are scheduled over 5-7 years, this can increase the value to the seller over a ‘tight’, highly leveraged MBO.
- The value of an EOT sale can be higher than that of an MBO as payments can be structured over longer periods.
- EOT sales without third party debt are more due diligence friendly than MBOs as the sellers are effectively backing themselves for repayment from the trust.
- Whilst managers do not necessarily get direct ownership while the payments are being made to finance the EOT sale, they do get to drive the growth of the business for the benefit of all employees and without shareholder dividends can earn in the ‘upper quartile’ for their sector and size of business.
- MBOs tend to have a cycle of repaying the debt and just as this is done, managers start thinking of their exit and shareholder value. The business never gets to invest properly, unless the management is exceptional, it is therefore held back from long-term growth reducing its legacy to society. In contrast, EOT owned businesses are proven to be more purposeful – they invest more, are more productive and contribute more to society through succession.
- EOT businesses have additional tax breaks such as income tax-free bonuses for all employees who are co-owners thereby rewarding everyone rather than just a few elite managers.
- Employee Ownership Sale’s enable highly motivated employees that would not otherwise be able to afford to buy a business to have a genuine involvement and in doing so the culture and ethos of the company remain intact after the sale.
Each approach, whether an Employee Ownership Sale or an MBO, is a valid exit structure. However, MBOs have been around longer than EOTs and are better understood. The EOT structure only really started to gain momentum in 2014 when the 100% CGT tax-free element was introduced. However, the take-up has remained small as trust structures are perceived as being complex; but in reality, with the right advisory team the process can be simplified and sale values can often exceed both trade and MBOs. Ensuring a greater legacy for you and your business.
The Dilemma Remains: Is An Employee Ownership Sale the Perfect Solution?
Some businesses certainly think so, ensuring a greater legacy for the seller and their company. In many cases, an Employee Ownership Sale will tick all the boxes and will be the right structure for all involved. In other cases, a ‘vendor funded or ‘leveraged’ MBO, an EOT/MBO hybrid, merger or, indeed a trade sale may better fit the bill. There remain many choices.
To help explore the right business sale structure for your own individual circumstances we offer a free initial consultation to provide some clarity & objectivity. If this is something you would like to discuss we look forward to hearing from you.
If you would like to discuss any aspect of our services in confidence – such as an Employee Ownership Sale – or would like some advice, please call +44(0)20 7788 8250, fill in our Contact Form or email us directly on av@avondale.co.uk for further information. Alternatively, you can watch our webinar “How To Sell Your Business to Your Team” here.
