Bye-Bye, Buyout: Exploring Alternative Exit Strategies for UK Businesses
As a business owner, contemplating an exit strategy is an inevitable part of your journey. Whether influenced by personal circumstances, business performance, or broader economic factors, choosing the right exit route is crucial for ensuring the long-term success and stability of your company. While traditional paths such as trade sales to corporate entities or private equity-backed buyers are well-known, alternative strategies might better align with your personal and business goals.
Management Buyouts (MBOs): A Familiar Yet Evolving Option
A Management Buyout, or MBO, is a common exit strategy where the existing management team purchases the business from the current owner. This approach allows the management team to take control and continue running the business, often with the support of external financing.
In the UK, MBOs remain a significant part of the mergers and acquisitions landscape. Despite a decline in overall merger and acquisition activity since 2021, MBOs continue to be a viable option, especially with the involvement of private equity firms. Private equity has been a major force in the UK mergers and acquisitions market, accounting for a notable portion of transactions by both volume and value in 2023.
Financing an MBO can be complex and involves various options. Secured and unsecured personal loans, business loans from banks or finance providers, private equity funds, and mezzanine finance are all potential avenues. For example, private equity firms can provide capital in exchange for shares, board seats, and dividends, though they often have an exit strategy within three to five years.
Employee Ownership Trusts (EOTs): A Growing Alternative
An Employee Ownership Trust, or EOT, is another compelling alternative to traditional buyouts. An EOT allows employees to own the business directly or indirectly through a trust, providing a smooth transition and ensuring the company’s culture and values are preserved.
Under an EOT, employees can hold shares directly or through a trust that manages the shares on their behalf. This model is particularly useful for businesses with a large number of employees or high staff turnover. For instance, an EOT can be set up where a trust holds shares, which are used for the benefit of the employees. This approach can enhance employee retention and instil a sense of ownership among the workforce.
Key Considerations for Choosing Between MBO and EOT
Control and Ownership
In an MBO, the management team gains control and ownership of the business. This can be appealing if the current management is well-equipped to lead the company into the next phase of its journey. However, it may not be a suitable choice if the team lacks the financial resources or expertise to manage the transition effectively.
An EOT, on the other hand, distributes ownership among employees, promoting a more democratic and inclusive management structure. This model is ideal for businesses where employee engagement and retention are critical to the company’s success.
Financing
MBOs often require significant external financing, which can be secured through several means including private equity and mezzanine finance. However, this can introduce new stakeholders with specific interests and expectations.
EOTs generally do not necessitate the same level of external financing, as the trust can be funded by the company itself over time. Nevertheless, setting up an EOT can involve intricate legal and tax arrangements that require careful planning.
Tax Implications
Both MBOs and EOTs come with distinct tax implications. For MBOs, the management team may face substantial tax liabilities on the purchase price, though strategic financial planning can help mitigate these concerns.
EOTs, on the other hand, offer tax benefits for both the seller and the employees. Sellers can benefit from capital gains tax relief, while employees may enjoy tax-free bonuses up to a certain threshold each year.
The Current UK M&A Landscape
The UK mergers and acquisitions market is showing signs of cautious optimism in 2024. Despite a decline in activity since 2021, the early months of 2024 have seen firm offers exceeding noticeable thresholds, hinting at a possible resurgence. Sectors such as technology, healthcare, and energy are expected to lead this rebound, propelled by a focus on innovation and the energy transition.
Private equity continues to play a prominent role in the UK mergers and acquisitions market, with American private equity firms increasing their activity. This trend underscores the enduring appeal of the UK as a destination for merger and acquisition deals.
Conclusion
Choosing the right exit strategy is a critical decision for any business owner. While MBOs offer a familiar path, providing the management team with substantial control and ownership, EOTs present a distinctive opportunity for employee ownership and engagement.
As the UK mergers and acquisitions market evolves, understanding the broader economic and sector-specific trends is key. With stable interest rates and lower inflation projected for 2024, the coming year may provide a favourable environment for exploring alternative exit strategies.
At Cutts & Co Accountancy, we understand the complexities involved in these critical decisions. Whether you are considering an MBO or an EOT, our team is well-equipped to guide you through the financial, legal, and tax implications, ensuring a seamless and successful transition for your business.
