If you’re looking to sell your business, then you’ll have a whole range of options available. If continuity is important to you, then selling directly to existing members of the team might be viable. You’ll have two options, here; you can either sell to your employees, in an ETO, or to managers, in an MBO.
What is an Employee Ownership Trust?
The Finance Act 2014 introduced a tax-incentivised mechanism for handing control of a business over to employees. This is called an Employee Ownership Trust. The incentives are designed in such a way as to channel business owners toward this form of succession, even if it takes longer to put into place than other forms of sale.
Proceeds from the sale of a business via EOT are exempt from capital gains tax. Moreover, employees can be granted a tax-free bonus of up to £3,600 per annum. With that said, there are a few conditions that must be met.
The trust must own a majority of the business’s share capital, and must treat all employees equally (broadly speaking). The business must be trading, rather than simply investing and waiting for a collection of assets to appreciate in value.
What is a Management Buyout?
A management buyout occurs when the management team buys the company. This is an option usually taken by companies wishing to take their operate private. This is usually favoured as an exit strategy by large conglomerates that wish to streamline, or by longstanding small business owners who wish to retire with a sense of community.
The management will typically have a strong understanding of the business and how it works – but they might lack the outside perspective necessary to foster true innovation, and to take the business forward. The managers will need to change their mindset to cope with the unique challenges of ownership – which, for many, isn’t all that straightforward.
Which is better for my business?
The tax incentives are currently arranged in such a way as to make and Employee Ownership Trust a very attractive option. If you fear that you are exposed to capital gains tax, then it may be particularly attractive.
The option you ultimately choose, however, will depend on the circumstances of your business, and your personal philosophy. If your management team don’t appear to be suited to the pressures of ownership, then selling to them might not be the wisest idea.
