Employee Ownership Trust (EOT) or Management Buyout (MBO)? What is the difference and which is right for your business?


Employee Ownership Trust (EOT) or Management Buyout (MBO)? What is the difference and which is right for your business?

When it comes to selling a business, owners have various options available to them. Two methods of business sale that have gained popularity are Management Buyouts (MBO) and Employee Ownership Trusts (EOT). Proving a trade sale is no longer the only or obvious option.

An Employee Ownership Trust, requires a minimum of 51% of your business to be sold to your staff through a Trust structure. Whilst a Management Buy Out (MBO) is where your company’s management team purchases the business through a new company, not a Trust.

Both EOTs and MBOs offer distinct advantages and considerations for business owners looking to transition out of their companies. We will explore the key differences between MBOs and EOTs, explaining each concept to help business owners start to weigh up which could be the most attractive option for their business sale.

What is a Management Buyout?

A Management Buyout (MBO) occurs when the existing management team or a group of managers within a company purchase the business from its current owner(s). This approach allows the management team to take control of the business’s ownership and management functions. Typically, MBOs are facilitated through a combination of personal investments, bank loans, and sometimes external equity financing.

Key Features of MBOs

Management Continuity

MBOs enable a smooth transition of ownership, as the existing management team possesses a deep understanding of the company’s operations, culture, and strategic direction. This continuity helps maintain stability and minimizes disruptions during the transition.

Incentivizes Senior Managers

MBOs provide an opportunity for key employees to become owners, aligning their interests with the long-term success of the company. This alignment can boost motivation, productivity, and loyalty among the workforce.

Flexibility in Deal Structure

MBOs offer flexibility in structuring the deal, allowing negotiations based on the specific needs and circumstances of the business and the management team. This flexibility can be advantageous in terms of financing arrangements and accommodating the financial capabilities of the management team.

What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is a structure designed to transfer ownership of a business to its employees. In an EOT arrangement, a trust is established, and the shares or assets of the business are sold to the trust. The trust then holds the shares on behalf of the employees, who become beneficiaries of the trust.

Key Features of EOTs

Employee Engagement and Ownership Culture

EOTs promote a sense of ownership and shared responsibility among the employees. This can result in increased employee engagement, productivity, and loyalty, as they directly benefit from the company’s success.

Tax Advantages

EOTs offer attractive tax incentives. For example, subject to meeting the relevant criteria the business sellers pay no Capital Gains Tax (CGT) on the shares sold to the EOT.

Additionally, the employees can receive up to £3600 free of Income Tax each year (subject to meeting the relevant criteria).

Long-Term Stability

EOTs are often seen as a means of securing the long-term future of the business. By giving employees a stake in the company’s success, it can create a more stable and sustainable business model.

Compare an EOT and MBO

As a quick visual aid we’ve created a comparison table. You’ll notice a Hybrid option, a mix of an EOT and MBO. We’ll be covering that in a later blog but you can always ask James Shand about this in a call.

There are similar options with an EOT and MBO too: Deferred consideration, payment up-front, immediate exit, ongoing seller involvement. All can be accommodated in either method. Your vfdnet FD starts by valuing your business, then crafting your deal to both meet your needs and also to be the best for your business’ future, through scoping, selecting and project managing the best specialist EOT lawyer.

+ or –EOTMBOHybrid
Debt Funding
Managers Incentive
Low CGT Tax
Profit Share – Tax Efficient
Governance Structure
Bank Loans?
Control Timing?
Cost to Business?
Likelihood of Completion✓✓

How to choose between MBO and EOT

The decision between an MBO and an EOT depends on various factors, including the owner’s objectives, management team capabilities, company culture, and desired legacy. Here are some considerations:

Ownership & Risk: If the owner wishes to pass on the business to a trusted management team who are risk takers then a MBO might be a preferred option.

Employee Involvement: If fostering employee engagement, participation, and shared ownership is a priority, an EOT could be the right choice.

Tax Implications: Assessing the tax advantages and implications associated with each option, based on deal timing, and the future likelihood of tax changes, is crucial.

Legacy and Social Impact: EOTs are often viewed as a way to preserve the company’s values and ethos while benefiting employees and the wider community. If leaving a lasting legacy is significant, an EOT may be more appealing.

Both Management Buyouts (MBOs) and Employee Ownership Trusts (EOTs) offer unique benefits and considerations for business owners contemplating a sale. MBOs provide management continuity and flexibility in deal structure, while EOTs foster employee engagement and offer potential tax advantages. The decision between the two ultimately depends on the owner’s objectives, the management team’s capabilities, and the desired legacy. Evaluating these factors carefully will help you choose the most suitable option to ensure a successful and fulfilling transition for you personally but also for your business and its employees.

The role of a Virtual Finance Director

vfdnet FDs can explore both options with business owners in a safe place before any wider communication takes place. We use our diagnostic ReadiMap tools to support you in the decision-making process, working out what’s important to you, what will suit your business and get you the outcome you deserve – financially and future life post-sale.

Our deal experienced Virtual FDs have lead trade sales, acquisitions, management buyouts and, since 2015, business sales to EOTs.  Commencing with your business valuation, we help you plan your EO transition to ensure all stakeholders interests are recognised, collaborating and project managing specialist EO lawyers, engagement experts, banks and funding providers.

Arrange an EOT discovery call with James Shand at a convenient time to suit you for a chat in confidence about your business sale plans and desires for your exit strategy.

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