Exit Options: From a Trade Sale to an Employee Ownership Trust

10 June 2022 |
by Rachel Gill

There is no doubt about it that a trade sale will, by and large, generate a larger consideration than other exit opportunities, and the reason is mostly related to the usual obvious synergies in a trade sale, either a vertical buyer or a horizontal one.

These range from cost-cutting in central services to cross-selling opportunities, or alternatively just the chance to remove a competitor. But not all businesses sell or are even saleable in the first place. The reasons for this can range from a deal structure or value that cannot be agreed upon, to the business being too reliant on the owner or a multitude of other reasons.

So, what can the vendor do if either their trade sale falls through or never gets off the starting block?

There are various options the vendor can consider, including:

  • Wait and relaunch at some time in the future as markets and appetites can change
  • Consider a Management Buyout (MBO), assuming the key management have the desire and the financial appetite
  • Don’t sell, well this may not be a long-term option as much will depend on personal circumstances
  • Go for a Private Equity deal, much of this will depend on your deal size, a modest deal will be unlikely to be attractive and PE deals often have strict criteria on exit options
  • Transfer your business to the staff via an Employee Ownership Trust (EOT)

The last option has much in its favour for multiple reasons. These include it’s relatively quick to implement an EOT, as long as you meet the conditions required, it’s much more cost-effective in terms of professional advisers than any alternative (other than not selling of course), it provides for tax-free consideration for the vendor and ownership passes to all staff at no personal cost.

The vendor also has the option to stay in the business and be as involved or as little as what works best for all parties. The Trust company (where the owner’s shares get transferred into) can gear up against its assets to fund a transaction if desirable, or the vendor can support the payment through a loan note. The biggest advantage however is that with an EOT the business retains talent and rewards those staff who have created the value, plus PR opportunities for a business moving to an EOT can be exponential.

If you would like to discuss your succession planning further, and which option may be right for you, please get in touch and we would be happy to discuss your options and the processes.

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