A choice of options will ultimately give you peace of mind…
When selling a significant asset like your business, a choice of options will place you in a stronger negotiating position and ultimately give you peace of mind.
Selling to a third party...
In some instances, businesses may benefit from being part of a larger organisation that can offer employees career progression and is able to take the business to the next level.
Selling to a third party means that a proportion of the sale price is available on day 1, however this needs to be weighed against a capital gains tax liability. If your business is operating in a buoyant sector commanding inflated valuations, this may help offset the tax bill.
On the other hand, if you're operating in a sector where valuations are typically low, then the tax advantages offered by employee ownership may prove advantageous from the outset.
Some owners try selling on the open market first and if deal structures, and tax implications prove unattractive decide to sell to their employees instead.
Management buyout (MBO)
For some, a management buyout can be attractive, especially where some shareholders wish to remain with the business, making it easier to secure funding.
An MBO suits businesses with strong cashflow, which is needed to fund an exit. Managers remaining with the business are more often than not required to contribute some personal funds alongside participating investors.
When considering an MBO, it’s important to ascertain if your business and management team is able to finance an MBO before you reveal your proposal. This safeguards key relationships with your management team should an MBO prove unviable. Your management team must also be strong enough to continue running the business following your departure.
It's worth remembering that departing shareholders are faced with a Capital Gains Tax liability and acquiring managers who aren't already shareholders may struggle with funding, especially in asset light businesses. In these cases an EOT, or sale on the open market may be better options for you and your business.
Employee ownership...
Corporate culture and endless cycles of MBO's aren’t for everyone, and employee ownership can preserve a company’s unique identity and ethics while maintaining a similar growth trajectory. Employee ownership delivers all the benefits of having sold your business and more, including getting your time back, but you also get to ensure your business is heading in the right direction before saying goodbye completely. Alongside selling to outside investors and MBO’s, employee ownership trusts are becoming increasingly popular achieving 21% average growth year on year since 2018.
Due to changes in the capital gains tax regime in 2020, employee ownership trusts, regularly outperform selling on the open market. We believe employee ownership should be considered by every shareholder contemplating succession. Here’s why…
Tax Free:
Rather than selling your business to an outside investor, your business can be sold to your employees' tax free with a 98% rate of success. Any excess cash forms part of the consideration and is distributed tax free on day one.
Flexible:
Employee ownership gives you the opportunity to structure the terms of the transaction to suit your situation. You can proceed at your own pace and continue serving as a trustee, director, or employee or step away entirely.
Ethical:
When the ownership of your business transfers to your employees, it transitions from an autocracy to a democracy. Employee representatives are elected to the board of trustees and board of directors preserving some legacy company values and values important to employees moving forward. Employees are eligible for tax free bonuses up to £3600 per annum.
Call us on 01384 274 778 / 075 888 925 88 to discuss or go ahead and book a free consultation to discuss your options.
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