Options for Business Sucession and Exit

Many business owners don’t prepare their companies for sale, leading to difficulties when they eventually try to retire. Without a sucession plan, businesses often close with no one to take them on. There are several options for business sucession: management buyout (MBO), employee ownership, and family succession are popular, or in the absence of one of those, there’s a straight business sale.

Family Succession

If a willing and capable family member can be found, family succession allows the business to remain within the family, with leadership and ownership transferring to the next generation.

The transfer can be achieved through a family buyout or gifting shares. Gifting shares may involve inheritance tax implications, but Gift Holdover Relief can defer CGT until the shares are sold.

Management Buyout (MBO)

An MBO involves the management team purchasing the business from the exiting owners. This option ensures continuity as the management team knows the business well. However, the team must have the financial capability to buy out the current owners or take on debt. In the UK the proceeds are subject to capital gains tax (CGT), currently at 20%, though Business Asset Disposal Relief (BADR) can reduce this to 10.  Currently BADR applies to an entrepreneur’s lifetime gains of up to £1,000,000.

Partnering the management team with the right co-owners can add broader financial and business acumen than was in the business previously, structure the purchase and the transition effectively, and support the new ownership team to succeed. 

Employee Ownership (EOT)

In employee ownership, the business is transferred to employees either directly or indirectly through an employee ownership trust (EOT). This provides continuity while allowing employees to benefit from ownership. If structured correctly, sales to an EOT are exempt from Capital Gains Tax making the sale very tax efficient, and employees can receive annual tax-free bonuses of up to £3,600.

Many businesses opt for a hybrid model where shares are divided between an EOT and individual employees, ensuring long-term stability.

As with an MBO it may be that the employees need to bring in new expertise to make the transition a success, or start a new era of growth with fresh hands at the wheel.

Financing an EOT or MBO

In both cases it isn’t always necessary that the acquiring team of managers or employees is flush with cash.  If deals are well structured the purchasers may finance the transfer using debt, or over a few years, paying for the business from its profits.  This implies that the seller doesn’t walk away with all the money immediately, but it does mean that the sellers can receive significantly more for their business over time. By avoiding paying lots of interest to a 3rd party lender, there can be much more for those involved in the transaction. Typically this also incentivises the old owner with a residual interest to ensure their MBO or EOT team are successful.  There are dozens of good structures for financing these kinds of deals so it makes sense to explore the options.

Business Sale

If none of the above options are realistically available to you, then the traditional business sale becomes the likely route to an exit.  We’ll look at some of the pitfalls and benefits of that approach in another article.