There comes a day when every business owner must decide not just when, but how, to exit their company – perhaps to start another type of business, follow a long-held dream or retire.
Business owners considering an exit may have been reviewing their plans after recent changes to Entrepreneur’s Relief, and Covid-19 has provided a further complication. It is possible that valuations will be negatively impacted, at least until the business can demonstrate a sustained period of recovery, and preferably growth. What the current situation tells us is there is no certainty and business owners should consider their personal and professional positions and aspirations, and review all options.
While there are many exit options to mull over, we have seen a marked increase in the popularity of Employee Ownership Trusts (EOTs) as a growing number of business owners express concerns about other options around trade sales. These include lack of privacy, the time required for the bidding and due diligence, as well as the potential for a ‘price chip’ late in the deal process.
Options available to owners looking to exit include a sale of the business to a trade buyer; or to the company’s management team – that is, a management buyout (MBO); or to an employee ownership trust (EOT), which is a trust set up for the benefit of the employees. There are pros and cons to each.
Selling all, or most of a business to an EOT – which is structured differently to a traditional MBO – allows all employees to have a financial interest in the company, as beneficiaries of a trust, without the need to personally invest. Employees can receive a bonus of up to £3,600 each year tax free (once the sale price has been paid in full), and the company gets tax relief on this. Such incentives can lead to superior business performance as employees benefit directly if the business does well. Employee-owned businesses tend to also be better at recruiting and retaining talented, committed staff – an important consideration in current market conditions.
Post-sale, the business continues to be run by the company’s management team. However, if the team is not ready to take over, the business owner can stay on and continue to manage the company as a paid director. The owner works with the team to enable them to take over the running of the company at some point. This option requires an external valuation of the company to set the sale price, and is likely to have the highest level of deferred consideration.
Famous large EOTs include John Lewis, but there are also SMEs that are wholly, or majority owned by an EOT such as Aardman Productions.
Selling to an EOT tends to be quicker than other types of sale as there is a ready buyer and a less onerous and intrusive due diligence and legal process. In addition, no capital gains tax is currently payable by the business owner, potentially a significant saving when compared to other trade sales.
The taxation regime is regularly under review by Government and the range of Government measures put in place to react to Covid-19 has introduced a new impetus to this process as the Treasury seek to balance the books – perhaps an additional factor when business owners consider their plans for the next year or so.
An EOT is a very collaborative approach which engages all employees. However, they are complex and there are potential pitfalls. We recommend anyone planning to sell to an EOT ensures they use experienced advisers that have previously dealt with EOTs to ensure that all HMRC requirements are met.
If you have any queries about these options or would like to discuss exit strategies with a member of our Corporate Finance team, get in touch with your local Azets office.
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