MBO vs EOT: Choosing the Right Exit Strategy for Your Business

Thinking about your exit strategy? Two of the most popular alternatives to a traditional trade sale are Management Buyouts (MBOs) and Employee Ownership Trusts (EOTs). We explore how each works, together with the advantages and disadvantages business owners should consider before making a decision.

What is a Management Buyout (MBO)?

An MBO involves the existing management team acquiring all or part of the business from the current shareholders.

Typically, the management team will form a new company to acquire the shares and fund the purchase using, for instance, personal investment, bank funding, private equity investment and/or deferred consideration payable to the sellers over time.

An MBO is often attractive where there is a strong management team already running the day-to-day operations of the business and the owners wish to pass control to individuals who already understand the company, its customers and its culture.

Advantages of an MBO

• Continuity of leadership and operations.
• Management are already familiar with the business and its challenges.
• Can often be completed more quickly than a third-party sale process.
• Allows key individuals to participate directly in the future growth of the business.
• Greater flexibility in deal structuring and funding arrangements.

Disadvantages of an MBO

• Funding can be challenging, particularly for larger transactions.
• Sellers frequently need to leave part of the purchase price in the business through deferred consideration.
• The management team may have limited personal resources to invest.
• Negotiations can become sensitive where managers are both buyers and existing employees.

What is an Employee Ownership Trust (EOT)?

An EOT is a trust which acquires a controlling interest in the company on behalf of the employees.

Instead of ownership passing to a management team or third-party buyer, the business becomes indirectly owned by its workforce through the trust structure. The selling shareholders are usually paid over time from the future profits generated by the business.

Since the introduction of EOT legislation, the model has become an increasingly popular succession option for business owners seeking to preserve a company’s culture and independence.

Advantages of an EOT

• Potentially significant tax advantages for qualifying selling shareholders.
• Provides a succession solution where there is no obvious third-party buyer.
• Helps preserve the company’s culture and independence.
• Can improve employee engagement and retention.
• Allows ownership benefits to be shared across the workforce rather than a small group of individuals.

Disadvantages of an EOT

• The sale proceeds are commonly paid over a longer period than in a traditional trade sale.
• The transaction is heavily dependent on future business performance and profitability.
• The legislation contains strict qualifying requirements which must be maintained.
• Governance arrangements can be more complex due to the involvement of trustees.
• Key management may require separate incentive arrangements to ensure continued motivation.

Which Option is Best?

The answer depends entirely on the objectives of the shareholders and the characteristics of the business.

An MBO is often the preferred option where there is an ambitious management team keen to take ownership and capable of funding the acquisition. It can provide a clear transition of control and strong incentives for future growth.

An EOT may be more suitable where shareholders wish to preserve the company’s legacy, reward employees collectively and potentially benefit from the favourable tax treatment available under the EOT regime.

It is also worth noting that the two structures are not always mutually exclusive. In some cases, businesses adopt a hybrid approach, using an EOT as the principal ownership vehicle whilst implementing share incentive arrangements for key management personnel. This can combine the benefits of broad employee ownership with meaningful incentives for those responsible for leading the business.

Final Thoughts

There is no “one size fits all” solution when it comes to business succession planning. Both MBOs and EOTs can provide effective exit routes, but they involve different commercial, legal and tax considerations.

Business owners should take advice at an early stage to explore their objectives, assess funding options and determine which structure is most likely to deliver the outcome they are seeking.

At BHW Solicitors, our Corporate & Commercial team regularly advises business owners, management teams and Employee Ownership Trusts on succession planning, management buyouts and employee ownership transactions. If you are considering an MBO or EOT, please get in touch to discuss the options available to you.