.svg)
£1Bn+
of EOT transactions advisedOne Team.
One Engagement.
Full service.
Sale to EOT vs Trade Sale
A sale to a trade buyer can potentially lead to a higher headline price, for instance where the buyer can generate significant synergies or in certain sectors where valuation multiples may have become "frothy". A trade sale might also introduce new capital and opportunities to grow the business but at the same time it can be detrimental to employees if cost saving measures are a key part of the synergies looked for.
01
With a sale to a trade buyer
The selling shareholders should receive the majority of the sale proceeds (e.g. 70%) in cash at completion. Most trade sales will however include a significant earn-out element (e.g. 30% of the sale price) which will only be paid in full if performance targets are met (e.g. in Years 1 and 2). In the earnout period the selling shareholders will have limited control over the company which puts the earnout at additional risk.
A trade sale has significantly higher "execution risk" than an EOT transaction as a willing trade buyer must be found which may require an extensive marketing exercise, the buyer may then have to raise additional funding to finance the purchase and will wish to undertake extensive due diligence on the business. Late changes to the "agreed" deal price are common and can lead to deals aborting in acrimony.
With an EOT transaction
The sale price is set at market value as determined by an independent valuation with the sale price paid to the selling shareholders as a payment at completion (of the surplus cash and other assets in the business) with the balance paid in instalments, typically over a 5 to 8 year period.
This deferred consideration is not subject to the business achieving specific performance targets but may be delayed if the business does not meet expectations. Similarly, if the business outperforms the deferred consideration can be paid quicker.
Trade Sale
24%
CGT on the gain made (18% on the first £1.0m of the gain if BADR applies)
Sale to an EOT
12%
with EOT Relief, CGT at the much lower rate on the gain
The advantages of the EOT route
01
Flexibility & succession
An advantage of an EOT transaction is that it offers business owners additional flexibility in terms of how the deal is structured and how management and employees are incentivised. Founders often continue working in the business after the sale to an EOT and can plan their gradual retirement and implement management succession plans.
02
Timing, cost & speed
A further advantage of a sale to an EOT is it gives business owners control over the timing of the sale and over the sale process. A sale to an EOT also has significantly lower deal costs and can be completed over a shorter timescale.
03
Independence & culture
A sale to an EOT also ensures the business remains independent and its culture unchanged.
An offer you already have can still work for you.
Some business owners may arrive at this page because they have been through a trade-sale process that has failed for any variety of reasons. If you have had an offer from a trade buyer we can use this to help set the parameters for our valuation for the company.
Sale to EOT vs Sale to Private Equity
Private Equity investors form an integral part of the UK economy, introducing growth capital, advising on business improvements and "professionalising" smaller companies to enable them to compete.
"A sale to an EOT is different in kind to a sale to Private Equity, not in degree."
The buyer is a Trust whose only beneficiaries are the workforce. There is no clock ticking for a secondary exit event, no external debt leverage put into the structure and business decisions get made by the management team currently in place and there is a flexible timeline over how the former business owners implement succession plans.
02
With a sale to Private Equity
Private Equity investors will usually leverage their deals to maximise their equity returns so the target business will typically be taking on debt. To achieve the equity returns they require the Private Equity investor will want to develop a plan for the business that shows strong profit growth over their short to medium term investment horizon (e.g. 3-6 years) and can support a planned secondary sale of the business at a higher value. The profit growth looked for might be obtained by growing sales or through a roll up of smaller businesses into a larger group whilst cutting overheads.
In terms of the pricing and the structure of the consideration, a sale to Private Equity may resemble a Trade Sale but the Private Equity investor may also be looking for the business owners to roll part of their consideration (e.g. 25%) into equity in the acquisition vehicle with that equity only being realised when a secondary sale is completed. This requirement reflects the fact that Private Equity investors are looking for a strong commitment from the business owners to implement the agreed business plan to take the business into a secondary sale. At some stage in the plan the leadership of the business may be moved from the former business owners to set the business on track for the secondary sale.
A sale to Private Equity has significantly higher "execution risk" than an EOT transaction as the Private Equity buyer has to be found and they will usually want to raise debt finance to part fund the purchase, and both the Private Equity buyer and the debt provider(s) will need to undertake extensive due diligence on the business. Late changes to the "agreed" deal price are common and can lead to deals aborting in acrimony.
With an EOT transaction
The sale price is set at market value as determined by an independent valuation with the sale price paid to the selling shareholders as a payment at completion (of the surplus cash and other assets in the business) with the balance paid in instalments, typically over a 5 to 8 year period.
This deferred consideration is not subject to the business achieving specific performance targets but may be delayed if the business does not meet expectations. Similarly, if the business outperforms the deferred consideration can be paid quicker.
Sale to Private Equity
24%
CGT on the gain made (18% on the first £1.0m of the gain if BADR applies)
Sale to an EOT
12%
with EOT Relief, CGT at the much lower rate on the gain
The advantages of the EOT route
01
Timing, cost & speed
A further advantage of a sale to an EOT is it gives business owners control over the timing of the sale and over the sale process. A sale to an EOT also has significantly lower deal costs and can be completed over a shorter timescale.
02
Independence & culture
A sale to an EOT also ensures the business remains independent and its culture unchanged.
An offer you already have can still work for you.
Some business owners may arrive at this page because they have been through a private equity sale process that has failed for any variety of reasons. If you have had an offer from private equity, we can use this to set the parameters for our valuation for the company.
EOT vs Sale to the Management Team (MBO)
Selling to the Management Team is an option where there is a strong management team that is keen to have a direct shareholding in the business and the business owners are looking to retire or may have already retired.
03
Two ways an MBO gets funded
Backed by private equity
The Management Team would usually need to find a private equity investor who may then bring in a debt provider and the deal would then broadly follow the sale to Private Equity route with the advantages and disadvantages discussed above.
Whilst the business owners would not be expected to roll over any of their equity in this scenario, they are potentially somewhat at a disadvantage in terms of negotiating price with both the Management Team and the private equity investor and also have the risk that an aborted deal may well leave them with a discontented Management Team. A further issue that can arise is that the private equity investor is likely to want the Management Team to put in a meaningful amount of their own money for the "sweet equity" they subscribe for to show their commitment and for some Management Teams this is unpalatable.
Funded by the sellers, a "VIMBO"
An alternative to private equity finance for an MBO transaction can be the business owners themselves if they are prepared to take the bulk of the sale consideration in the form of Loan Notes. This is referred to as a vendor-initiated management buyout ("VIMBO").
Whilst a VIMBO transaction gives business owners a good level of control over the sale process and has considerably less deal risk than a trade sale or a sale to private equity, it comes with potential disadvantages to an EOT, in particular the Management Team will be looking to pay the lowest price possible and will be discontented if the deal falls through. In addition, the business owners are taking a significant risk by passing ownership and control to the Management Team in so far as they are relying on that team to be right for the business and to work well together over the medium to longer term and not fall out.
12%
with EOT relief
Most management teams can be fully incentivised within the EOT structure.
A VIMBO transaction can be the right answer in certain circumstances, however we have found that most management teams can be fully incentivised using the EOT structure and this route ensures that the business owners get the right price for their business and get the benefit of EOT Relief (12% effective CGT rate).
Incentivising the management team inside an EOT
The incentives available in the EOT structure include:
01
Share options
Granting management share options (e.g. an EMI Scheme) that can give them a direct equity investment in the company.
02
Long term incentive plan
Putting in place a long term incentive plan (LTIP).
03
Profit share
Simply allocating a specific share of profits to the management team.
Is selling to an EOT the right choice?
Listen to the interview with Matthew Baker, Co-Founder of Foundry 3 who talks about why he sold the business to an EOT and how that compared with his experience with previous businesses sold to trade and to private equity
Jo Ranger, Co-Founder of Grierson Dickens
"We felt a loyalty to our clients and to our team. EOT is repaying our clients’ trust and repaying the team’s efforts."
Despite reassurances from those purchasers that they would respect and continue with our business model, we felt that would always be slightly uncertain because you never know what will happen to that company.
The other side was that our employees had grown up in our environment, and those companies that might have bought us would be likely to find cuts in overheads, and in our business that is about people.
So we felt a loyalty to our clients and to our team, and therefore EOT seemed like a really positive route to go down. Our staff retention has been very good, and we know from conversations with them that retention has been largely based on the fact that they knew we were going down the EOT route, and we did what we said we would.”
EOT vs Alternatives - common questions.
A trade buyer should in principle be able to pay the highest price for your business. The buyer may be able to realise “synergies” through a combination of the two businesses, and should be prepared to pay a premium. A private equity buyer may be able to offer an attractive price for the company as a result of efficient funding structures (use of debt) and possibly synergies (if acquiring through a platform company). The EOT, as the buyer in an EOT Transaction, cannot generate synergies or use aggressive debt structures. However, the price it pays is set at an independent valuation which reflects the average price paid for similar businesses, so the price it offers is not set at a discount to the market price. A trade sale or private equity sale can often fail to complete due to problems during due diligence, or a failure to raise funding, or through onerous warranties / indemnities being demanded by the purchaser. Indeed, we estimate that over 75% of SMEs that initiate a sale process fail to achieve completion. Furthermore, if completion does occur, vendors of SMEs often find that the initial headline price for the sale, which may be attractive, is not always realised. Adjustments arising from completion accounts, earn-out structures, warranty claims and minority share retentions can reduce the actual proceeds received on sale well below the headline price. An EOT sale is simpler to execute (in our experience >95% completion rate, as both due diligence and funding structure are more straightforward). Furthermore, the sale price is set by an independent valuation which is fixed, and is not subject to downward adjustment through earn out structures. In addition, the proceeds on sale of shares to an EOT are taxed at a lower rate (12% effective rate of CGT through EOT Relief) compared to the 18-24% CGT rate levied on the sale of shares to a trade buyer or private equity.
On headline price, sometimes slightly. Trade buyers may pay a "strategic premium" of 10-20% above independent valuation for synergies. On net cash to the founder, the EOT route typically wins under the post-Budget regime once the 12% effective CGT rate is factored in versus the trade-sale 24% rate. RVE models both scenarios for your specific business at the engagement stage so you can compare apples to apples.
A sale of the Company to an EOT, or a sale of the Company to a management-owned Newco (“MBO”) both pass ownership to employees. However, in the former example all employees are indirect shareholders and in the latter just the top layer of management will be direct shareholders.
An MBO will have external funding - the Newco funds the purchase price from a combination of management’s own resources, from bank debt and from a financial investor. An EOT typically has no external funding, with the purchase price paid to the vendors over a 5-8 year period, and funded by the Company.
As a result, an MBO transaction with external funding would be expected to deliver all (or the majority) of the sale price to the vendors in cash at completion, with perhaps a minority of the sale price payable as deferred or contingent consideration.
An EOT transaction, in contrast, would deliver the sale price to the vendors in instalments, typically over a 5-8 year period.
An MBO requires the management team to make a significant personal financial commitment (via savings and/or bank debt secured against personal assets). An EOT is funded by the Company itself with payments to the vendor over 5-8 years.
A sale of shares to a Newco through an MBO transaction would attract CGT at 18% on the first £1m of capital gain (assuming BADR applies), and CGT at 24% on the balance of the gain.
A sale of shares to an EOT would attract CGT at 12% on the entire capital gain.
An MBO transaction has higher “execution risk” than an EOT Transaction as the Newco has to source external funding and undertake extensive due diligence on the Company.
A sale of the Company to a trade buyer would be expected to deliver all (or the majority) of the sale price to the vendors in cash at completion, with perhaps a minority of the sale price payable as deferred or contingent consideration.
An EOT transaction, in contrast, would deliver the sale price to the vendors in instalments, typically over a 5-8 year period.
A sale of shares to a trade buyer would attract CGT at 18% on the first £1m of capital gain (assuming BADR applies), and CGT at 24% on the balance of the gain.
A sale of shares to an EOT would attract CGT at 12% on the entire capital gain.
A trade sale has higher “execution risk” than an EOT Transaction as a willing trade buyer must be sourced, the buyer may have to raise additional funding to finance the purchase, and the buyer will wish to undertake extensive due diligence on the Company.
A sale of the Company to private equity would be expected to deliver a significant proportion of the sale price to the vendors in cash at completion, but the vendors will often be asked to retain a minority stake and remain with the business for an earn out period, with perhaps a minority of the sale price payable as deferred or contingent consideration. An EOT transaction, in contrast, would allow the sale of 100% of the shares but would deliver the sale price to the vendors in instalments, typically over a 5-8 year period. A sale of shares to private equity would attract CGT at 18% on the first £1m of capital gain (assuming BADR is available), and CGT at 24% on the balance of the gain. A sale of shares to an EOT would attract CGT at 12% on the entire capital gain. A sale to private equity has higher “execution risk” than an EOT Transaction as a financial buyer often has to arrange debt finance and will wish to undertake extensive due diligence on the Company.
We are happy to talk over Teams or meet to discuss your exit planning.
We can normally assess whether an EOT transaction will be viable and the likely valuation range at our first meeting.
For accountants, lawyers, and wealth managers
Are you working with a client who should be considering a sale of their business to an EOT? We will complement the work you do to deliver an optimal outcome for your client.