At some point in every business owner’s journey, the question of succession arises:
“What happens to the business when I step away?”
Business Succession planning is one of the most critical (and generally often overlooked) aspects of running a business. Whether driven by retirement, new ventures, or simply the desire to step back, planning your exit with clarity and foresight is essential for preserving your legacy, rewarding your efforts, and protecting your employees and customers.
There’s no one-size-fits-all solution here. Your ideal exit route will depend on a combination of factors, including your financial goals, company structure, management capability, cultural priorities, and appetite for risk
In this blog, we’ll explore the five most common succession options:
- Selling to a Private Equity Firm
- Selling to a Trade Buyer
- Management Buyout (MBO)
- Share Buyback
- Sale to an Employee Ownership Trust (EOT)
Each path has its own advantages and challenges, and making the right choice starts with understanding what each involves.
1. Selling to a Private Equity Firm
Private equity (PE) involves selling your business (either partially or wholly) to a private investment firm. These firms typically acquire businesses with the aim of scaling them, improving profitability, and exiting within 3–7 years via resale or IPO.
Pros:
- Attractive valuation: PE firms often pay competitive multiples, especially for high-growth or cash-generative businesses.
- Partial exit: Owners can “de-risk” by selling a stake, while retaining shares for a future “second bite of the cherry.”
- Growth support: PE firms bring capital, strategic insight, and connections to help scale operations.
Cons:
- Cultural fit: PE firms are driven by returns. Their approach may conflict with your company culture or values.
- Loss of control: Most PE firms will seek a controlling interest and want influence over key decisions.
- Pressure for performance: Increased reporting, KPIs, and performance targets can create pressure on management.
Best for:
Ambitious owners looking to scale and eventually exit entirely, while unlocking value in stages.
2. Selling to a Trade Buyer
A trade sale involves selling your business to another company in your industry (or a related one). This is one of the most common exit routes and can deliver high valuations, particularly where synergies exist.
Pros:
- Strategic value: Buyers may pay a premium for your market position, customer base, or intellectual property.
- Immediate exit: Often allows for a full sale and a clean break.
- Legacy preservation: If aligned, the buyer may integrate and grow the business.
Cons:
- Employee uncertainty: Staff may worry about job security or cultural shifts.
- Integration risks: Differences in systems, leadership styles, or strategy can lead to disruption.
- Loss of independence: Your brand may disappear within a larger group.
Best for:
Owners seeking a clean exit, especially in industries with active consolidation or strong buyer interest.
3. Management Buyout (MBO)
A management buyout occurs when the existing leadership team purchases the business from the current owner. The team usually secures external financing (such as bank loans or private equity) to fund the deal.
Pros:
- Continuity: The people who know the business best take over, ensuring stability.
- Employee loyalty: Staff morale often stays high with familiar leaders in charge.
- Legacy preservation: MBOs tend to maintain the company’s culture and operations.
Cons:
- Funding challenges: Management teams often lack personal capital and rely heavily on debt or investor support.
- Risk of underperformance: If the business doesn’t perform, debt obligations can create strain.
- Not always feasible: Not all management teams are willing (or able) to buy.
Best for:
Owners who trust their management team and want to reward loyalty while ensuring continuity.
4. Share Buyback
In a share buyback, the company itself repurchases the owner’s shares using surplus cash or borrowed funds. This reduces the number of outstanding shares and allows the owner to exit partially or fully.
Pros:
- Simplicity: A relatively straightforward legal structure, especially for smaller exits.
- Control remains in-house: Other shareholders or remaining owners gain a larger stake.
- Tax efficiency: If structured correctly, share buybacks can offer favourable Capital Gains Tax treatment.
Cons:
- Cash flow impact: Drains company resources and may impact future investments.
- HMRC clearance required: To secure tax treatment, proper procedures and advance clearance are recommended. Additionally, numerous tax and company law conditions must be satisfied, and often this is not the case.
- Not suitable for large exits: Typically works best for partial exits or when the business has significant reserves.
Best for:
Partial exits or restructuring ownership among existing shareholders where external buyers are not involved.
5. Sale to an Employee Ownership Trust (EOT)
An Employee Ownership Trust (EOT) allows the business to be sold to a trust set up for the benefit of all employees. Introduced in 2014, this model has grown rapidly in popularity, particularly in the UK.
Pros:
- Tax-free sale: Sellers pay 0% Capital Gains Tax on qualifying sales to an EOT.
- Employee engagement: Employees benefit from the business’s success and can receive annual tax-free bonuses.
- Preserve culture and independence: The company continues without interference from outside investors or competitors.
Cons:
- Deferred consideration: Sellers are often paid over time, funded by future profits.
- Complexity: Requires robust legal, tax, and financial advice to implement correctly.
- Not ideal for distressed businesses: Success depends on future profitability to fund buyout payments.
Best for:
Owners who value legacy, employee welfare, and long-term business stability over immediate maximum valuation.
Choosing the Right Path: Key Considerations
When deciding on your succession route, consider the following:
1. Your Financial Goals
Do you want to maximise your return, or are you comfortable with deferred payments? Are you seeking a partial or full exit?
2. Company Performance
Is your business currently performing well and cash-generative? This affects funding options, valuations, and buyer appetite.
3. Management Strength
Do you have a capable leadership team that can take over? If not, options like MBOs or EOTs may be harder to implement.
4. Cultural Values
Do you want the business to retain its identity and protect staff, or are you comfortable with change under new ownership?
5. Timing
Do you need to exit quickly, or are you willing to stay involved over a transition period?
Final Thoughts: Start Planning Early
Business Succession planning should start years before you intend to exit. Rushed sales often lead to poor valuations, legal complications, or misaligned outcomes.
Here’s what you can do now:
- Get a professional valuation to understand your company’s worth.
- Review your legal and financial structures to ensure readiness.
- Speak to your management team to assess interest in a buyout or leadership role.
- Explore your tax position—each exit route has different tax implications.
- Consult trusted advisers—a corporate finance expert, lawyer, and tax specialist are essential.
Whether you’re looking for a clean break, a gradual transition, or a way to reward your employees, there is a succession strategy that aligns with your values and goals.
Need help mapping out your succession strategy?
EotOwl are a specialist tax advisory practice focusing on business exits and Employee Ownership Trusts. The team are Chartered Tax Advisors who collectively have close to 100 years of tax advisory experience. If you are interested in paying 0% Capital Gains Tax by selling to an EOT, or wish to discuss other exit routes, then please contact us on 020 3442 8506 or email info@eotowl.com and the team would be more than happy to have a totally confidential discussion.
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