For many business owners planning their succession, the question of how to pass on their company is one of the most important – and often the most complex – decisions they will face. Two increasingly popular options are an Employee Ownership Trust (EOT) or a Management Buy-Out (MBO).
Both models provide a route to succession, but they differ significantly in terms of tax treatment, funding requirements, employee engagement, and long-term business stability. Understanding these differences is key to identifying which approach best fits your business.
What is an Employee Ownership Trust (EOT)?
An EOT is a special form of employee ownership introduced by the UK Government in 2014. It enables the employees of a business to indirectly own a controlling interest (more than 50%) in the company through a trust.
Key features of an EOT include:
Tax benefits: Sellers can benefit from a 50% exemption from Capital Gains Tax (CGT) when selling a controlling interest to an EOT, subject to qualifying conditions.
Employee bonuses: Employees can receive income tax-free annual bonuses of up to £3,600.
Long-term stability: EOTs are designed to protect the independence of the business and secure jobs for employees.
EOTs have been successfully adopted by businesses of all sizes, from household names such as John Lewis and The Entertainer to SMEs across sectors including professional services, retail, engineering, and manufacturing.
What is a Management Buy-Out (MBO)?
An MBO involves the company’s existing management team purchasing the business from its current owners. This model is often chosen where a strong leadership group is in place and there is confidence they can secure funding to complete the acquisition.
Key features of an MBO include:
Funding requirements: MBOs are typically financed through a mix of personal investment, bank lending, and private equity.
Retention of expertise: The management team already knows the business, its clients, and its market.
Flexibility: Unlike EOTs, MBOs don’t have statutory rules around ownership, so they can be more tailored to the sellers’ and buyers’ needs.
EOT vs MBO: Comparing the Two
When deciding between an EOT and an MBO, business owners should consider the following factors:
Factor | EOT | MBO |
Tax advantages | CGT reliefs available | Normal CGT applies |
Funding | Often deferred payment funded by business profits over time. | Requires upfront financing from management / investors |
Structure | Somewhat limited by statutory restrictions | Flexible (depending on source of finance) |
Employee impact | Benefits all employees, fostering engagement | Limited to management team |
Management | Allows existing management team to remain in place | Allows existing management team to remain in place |
Control | Long-term independence protected by the trust | Management team assumes control |
Exit speed | May take longer to fully repay seller | Can be quicker if funding secured |
Which is Right for Your Business?
The choice between an EOT and an MBO will depend on your priorities:
If your goal is to reward your workforce, protect the culture of your business, and benefit from favourable tax treatment, an EOT may be the right option.
If you prefer a management-led solution with potentially faster exit times and are confident in the team’s ability to raise finance, an MBO may be more suitable.
No two businesses are the same, which is why professional advice is crucial. At BPE Solicitors LLP in Cheltenham, our Corporate and Commercial team has extensive experience advising business owners and management teams on both EOT transactions and MBOs. We guide clients through the legal, tax, and commercial implications to ensure the chosen model works for both the seller and the future success of the business.
Thinking About Your Next Step?
If you are considering selling your business and want to explore whether an EOT or MBO is right for you, our team can help. Contact BPE’s Corporate team today to arrange an initial discussion by clicking here.
