Alternative exits

02 Nov 2022

By Paul Brown, Tax Partner

Many business owners we talk to are, frankly, absolutely exhausted after the last six years – in fact the last six weeks have been pretty tiring!  For many, thoughts are turning to whether now might be the time to hand over the keys to their business, bank a (hopefully) large cheque and retire gracefully (or in some cases disgracefully!).  Despite the travails of the economy in recent years there remains a very active market for those wishing to sell, with many funders and acquirers having large war chests of cash which they are looking to spend.

For many though the idea of selling to a competitor or even a business in adjacent industry does not appeal.  When a business owner has spent many years of hard graft building a business, they often want to see the independence of that business preserved rather than it being swallowed up by a large acquirer.

If that is your mindset then there are a number of alternatives which could allow you to cash in your hard-won value while still preserving your legacy and seeing your business continue to thrive into the future.  I’ve considered two such options below but there are a great many variations on the theme.

Employee ownership trust (“EOT”)

This is a structure which has been around for many years but is now gathering considerable momentum.  For may the first thing they hear about an EOT is that it gives them a way to sell their business without paying any tax.  If structured in the right way this is absolutely true, but I would strongly argue that looking at the tax position is starting to consider the opportunity from the wrong end.

Simply put a trust is created for the benefit of the employees of a business (for this to work it has to be a company rather than a partnership or sole trader).  This trust obtains funding (perhaps from the company, perhaps from a third party) and uses this to buy the shares in the company from the current owner(s).  Importantly the employees do not own the business – the trust does.  Instead, the trustees of the trust have a duty to hold the shares of the company for the benefit of all the employees.  There are some tax advantages the employees can gain where their employer is owned by an EOT and ultimately, they may benefit from the proceeds of any sale, but they do not own the business.  Nevertheless, the trust does allow the employees to have a real sense of (if not actual) ownership and there is a growing body of evidence to suggest that businesses owned in this way tend to grow and thrive for that very reason.

In creating this structure, the intent of the government at the time was to encourage employee participation and they created the incentive that the selling shareholders can indeed benefit from a tax-free gain on any sale.  However, if the only reason you are thinking of an EOT is to access the tax benefit then you are doing it for the wrong reasons.  If, however you have a company with a large and loyal employee base and have a desire to preserve your legacy and see the business thrive into the future, an EOT structure is one you should seriously consider.  If then as a consequence you don’t pay any tax on a gain on the sale, then that is a bonus rather than being the main reason for exploring this route.

Be warned though, implementing an EOT is not an easy win – it is complex and can be a relatively expensive process in terms of professional fees (though probably less expensive then selling your business to third party).  However, with the right mindset and the right advice and support an EOT structure can be that rarest of things, a genuine win-win!

Management Buy Out (“MBO”)

If an EOT is not for you but you still don’t want to go through a third-party sale, perhaps there is a group of people within your business who may have the appetite and the capability to buy the business from you.  An MBO does pretty much what it says on the tin – a group of management from within the business work together to obtain enough funding to buy your shares, either in full or more typically with you retaining a reduced shareholding in the business. 

There are many advantages to this approach.  Because all parties know each other, generally the process is less confrontational than selling to a third party.  It also removes the need to spend time marketing the business and potentially alerting your competitors to the fact you are looking to sell.  As a seller you can also take comfort that your legacy is safe in the hands of your trusted management team.

There are admittedly downsides – the value you receive is likely to be lower than from a trade sale and a decent chunk of your proceeds may well be deferred and paid out of future profits (hence why sellers often want to retain a stake – to protect their interests at least until they have received their cash).

Much does rely on having the right management team in place who have the will, the appetite, and the skills to not only do the deal but lead the business into the future.  If that is not there in your current management team then a Management Buy In, bringing third party management into the mix, could be an option.  It could even be the ideal is a combination of the two – what is charmingly known as a BIMBO…

If obtaining maximum value is (perfectly reasonably) your key aim, then an MBO (or an EOT) is unlikely to be for you.  If, however you want to balance your proceeds with other less tangible outcomes such as protecting your legacy or even making the deal as painless as possible then MBOs or EOTs could be worth considering – just don’t let the tax outcomes drive your final decision!

Be prepared

Whatever route you take there is a lot of hard work to be done to get your business ready for sale.  If you want to maximise value and ease the stress of the deal, waking up one morning and thinking “right, I want to sell now” is not going to get you there.  As a rule of thumb, I always say to really get your business ready to sell you need at least three years of preparation, ideally five.  That’s not to say that selling straight away is not an option – it’s just you are highly likely to walk away with a poorer deal than if you had put the hard yards in to get your business deal ready…

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