An exit from your business isn’t always just about the purchase price – owners will need to think about legacy, tax, employees and control. Where a trade sale of selling your business to a third-party buyer has always been the tried and tested formula, a sale to Employee Ownership Trusts (EOT’s) has gained increasing popularity after recent success stories and government support.
If you are planning an exit from your business, this article covers the key considerations between the two models of sale.
Valuation
You will need to consider whether you have a viable model that will be attractive to potential buyers and investors. If you do, a third-party sale can provide you with a higher sale price than you would otherwise achieve by a sale to an EOT. In an EOT, a valuation specialist may want to be more conservative as the business will need to ensure it can actually fund the agreed sale price, and it is not deemed above market value for HMRC purposes. There is also the benefit of having access to immediate cash in a trade sale, whereas it is common for EOT sales to be structured on a deferred basis.
However, whilst a trade sale may be assisted by a potential higher sale price, it is not uncommon to see various purchase price adjustments such as an earn-out target before a proportion of the purchase price becomes payable. We are also seeing more and more transactions based on higher deferred consideration elements. It is therefore prudent to ensure that you review the offer terms with a specialist and weigh up your options.
Transaction Process
A third-party buyer in a trade sale will expect a certain level of legal and financial due diligence. This can be a long and drawn-out process – and dependent on the outcome of this due diligence, it can lead to negotiation on price where any commercial, financial, tax or legal risk is revealed. There is also warranty and indemnity exposure for sellers in a trade sale which is uncommon in a sale to an EOT.
In comparison, if your business is suitable to an EOT set up, the sale process can be much more straightforward and whilst the EOT entity should always seek independent legal advice, there is lower negotiation, little to no due diligence (if there is no third-party finance funding the deal) and a low risk of transaction failure. In turn, this means that advisor fees can be lower, and the transaction time is quicker.
Tax Considerations
The general position is that a trade sale will attract a Capital Gains Tax bill subject to any Business Asset Disposal Relief. In comparison, a seller will pay no capital gains tax on their sale to an EOT (if the EOT is structured in the correct and eligible way). This is obviously a very attractive aspect of EOT’s and there are criteria’s that must be met for this relief. There have also been key post-Budget changes announced by the Government (in October 2024) to clamp down on the abuse of EOT’s such as genuine employee control, fair market value and important disqualifying events - where CGT relief can be lost if there is non-compliance. It is therefore important to engage legal and tax advisors early in the process to assist with the structuring and planning.
Employees
A trade sale to a third party can be a daunting process for longstanding employees of a company as it can mean cultural disruption and potential staffing changes. Recent success stories of companies who have sold to EOT’s have shown better employee engagement, retention and business sustainability. Where the criteria is met, employees may receive an income tax-free bonus each year up to £3,600 (currently for 2025/26).
Where a business is set up with a good management team and other employees who can drive the business forward, an EOT is a great way of incentivising employees and rewarding loyalty. Equally (albeit not as common), employees can be rewarded in a trade sale by way of share option schemes if a third-party buyer is concerned with employee engagement.
Legacy
Selling to a third-party buyer will almost always mean surrendering control for sellers – and can drive restructuring and change that is not the intention of exiting shareholders. Selling to an EOT will allow sellers to protect the culture and values of the business – and in many cases, sellers can maintain a role within the business. In an EOT, it is essential that there is genuine employee control and therefore, whilst the former owners cannot form or influence the EOT company, or their board, the employee control element can drive forward the legacy that the exiting shareholders have built over many years. We see this to be a key consideration for many owner-managed and family-owned businesses.
What is right for your exit?
The takeaway message is that whilst trade sales have always been the “done” thing for retiring owners of businesses, it is not the only option, and where Business Asset Disposal Relief is becoming less favourable, and third party sales are becoming more competitive, business owners must weigh up their options.
What both routes have in common is that the right legal and tax advisors should be engaged early in the process.
The Corporate team at mfg Solicitors LLP are well versed in various corporate transactions and will be able to discuss your plans and explore the options available. Contact Kiran Kaur by emailing kiran.kaur@mfgsolicitors.com, or giving us a call on 0121 2367388.
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