Business Succession Options: Which exit route is right for your company?

A question of succession – deciding which option is right for you.

Succession planning is one of the most important decisions a business owner will make. Whether you are considering a management buyout (MBO), selling to an employee ownership trust (EOT), or exploring a trade sale, understanding the advantages and implications of each route is essential.

As a founder entrepreneur you have given years, often decades, of blood, sweat and tears to build your business. You have taken risks, applied judgement, acquired resilience and enjoyed the rewards of success.

Then, often sooner than expected, the question arises: what happens next?

Ownership succession affects not only your own financial future, but also your employees, your customers and the business you have worked so hard to create.

This article explores the principal options available to you as a business owner and some key issues to consider when deciding which route to take.

Three key questions to start your succession planning

Before diving into structures and tax, it is worth stepping back and asking three fundamental questions:

1. Does my company have a strong independent future, and is this what I would prefer?
2. Should the employees acquire an ownership stake?
3. How will I plan for leadership succession?

Your answers to these questions will help decide the right succession option for you.

Should your business remain independent?

For many founders, preserving the Company’s independence is a priority.  Advantages can include:

• maintaining agility and entrepreneurial freedom
• protecting the culture and values you have built
• preserving jobs and local identity
• creating space for fresh leadership and energy from within

However, sometimes a sale to a third party may provide advantages which outweigh those of continued independence, such as new economies of scale in a larger group, new leadership and access to wider markets.

There is no single correct answer. It depends on your objectives and the nature of your business.

Should employees become owners?

There is clear evidence that this can bring significant benefits which we would urge any business to consider:

• Company: improved productivity and performance through greater employee engagement plus longer term resilience
• retiring owners: legacy and the preservation of culture and independence
• employees: increased and clearer purpose, voice and involvement and the opportunity to share in profits

Leadership Succession: who will run the business?

Whatever new ownership structure you choose, you will also need to consider who is going to take over running the company. Continued independence will only be possible if you have, or can grow or recruit, a new leadership team.

Is there a capable and committed management team ready to step up? Will you remain involved for a period, or do you wish to exit quickly?

Business succession options if you wish for the company to remain independent 

If continued independence is a priority, your main options are:

• A management buyout
• A management buyout combined with employee ownership
• A sale to an employee ownership trust)

Management Buyout (MBO)

An MBO is a long-established form of internal ownership succession in which a new generation of leaders also take over the ownership.  Here, the founder would generally sell to a new company (Newco) owned by the management team.

Payment of purchase price may be:

• paid in instalments from future profits (vendor funding) or
• partly or wholly paid upfront using third party investment and/or bank loans to the Newco.

From a tax perspective, you as the seller will pay capital gains tax (CGT) (at 24%, or 18% on the first £1m of gains if you qualify for business assets disposal relief). Payment of CGT can generally be structured in instalments over a period of years linked to when you are paid.

An MBO can work well where there is a strong and entrepreneurial new management team but on its own does not involve broader employee participation.

We would always advise a retiring owner to consider the potential benefits of also creating an ownership stake for employees, in which case the two other approaches which follow should be considered.

Management and Employee Buyout (MEBO)

Where there is a preference for a new generation of leaders to acquire a major ownership stake alongside wider employee ownership a MEBO may be an attractive solution.

This could be structured in a similar way to an MBO but with Newco’s new shareholders also including:

• either individual employees
• or (simpler) an employee trust (providing a stake in the company without the risk of personal investment and with the prospect of sharing in profits).

The tax treatment would generally be the same as for an MBO.

However, if some shares (at least 10%) are sold to a specific form of employee trust (a Share Incentive Plan), it may be possible to pay 0% CGT if sale proceeds are reinvested in other investments.  A Share Incentive Plan (SIP) is a way to create individual employee share ownership with separate tax reliefs for employees.

Employee Ownership Trust (EOT)

Over the last few years selling to an EOT has been the fasted growing exit route for UK private company owners (over 2,500 companies at the end of 2025, including our own firm).

An EOT sale involves the founders selling either all or a majority (more than 50%) of shares to a trust which holds the shares for the benefit of all employees.

It is also possible to provide an additional incentive for staff through personal and direct share ownership such as implementing an Enterprise Management Incentive (EMI) plan. This would be a way of providing a more significant ownership stake for managers but not to the extent of a MEBO.

Key EOT features typically include:

• payment for the shares is usually made over time from the company’s future profits
• The Company remains independent
• the rewards of success are shared with all employees, who take no personal financial risk

An EOT has two tax advantages:

• Sellers are charged capital gains tax (CGT) on their total chargeable gain at a rate of 12% rather than the current main rate of 24%, with a facility for payment in instalments.
• Employees can be paid an annual bonus free of income tax up to £3600 (National Insurance still applies).

In addition to these tax benefits, many founders are attracted to an EOT to preserve the company’s independence and because of the  strong platform it can create for further growth through employee engagement in its success.

As with a MEBO (see above) some shares could be sold to a Share Incentive Plan trust, giving a 0% CGT rate.

External Sale Options

Where continued independence is not a key priority, a sale to a third party may be attractive.

Trade Sale

This may be possible where a trade buyer can be found (often not straightforward or even possible) who sees strategic value in integrating your business with its own. This can sometimes generate a higher headline price, particularly where cost savings or cross-selling opportunities exist.

However, integration often brings change – which may include restructuring and/or redundancies.

Private Equity (PE) Investment

A PE buyer may be feasible in some business sectors.  It will generally look to grow and increase your company’s value over a defined time period before selling it on for a profit. This will often involve a laser focus on cost cutting.  Founders may:

• sell 100% of their shares (or nearly all)
• roll over at least half their shares into the investment vehicle/new holding company. agree to link some of the purchase price to future performance (an earn out)

A PE sale may involve creating a long-term reward plan for key and/or all employees.

A founder will pay CGT at 24%/18% (as above) but any rollover into new shares (or loan notes) may defer when the tax is paid.  The tax treatment of any part of the sale price that is dependent on future performance is more complex.

For some owners, this route can offer growth capital. For others, it may be less attractive compared with continued independence because of shorter investment horizons, the potential for its hard won culture being lost, employee redundancies and the opportunity to harness employees’ engagement for further business growth being destroyed.

Key Practical Considerations

Price

Please note the following:

• in an EOT sale, the trustees must ensure they are not paying more than market value, supported by an independent valuation
• under an MBO or MEBO, the price is likely negotiated between the seller(s) and the buyer(s), often with support from at least one professional adviser.
• in a trade or PE sale, price will also be negotiated. Strategic value may influence pricing - sometimes upwards.

Timing

A sale to an EOT or vendor funded MBO or MEBO may often be quicker to complete compared with any alternatives and the founder will often be able to set the timetable.

With a trade or PE sale (or externally funded MBO or MEBO), due diligence is likely to be disruptive and add significantly to the time, cost and work involved.

Regulatory approvals (where relevant) can extend timelines under any structure.

Warranties and indemnities

A trade or PE buyer will likely require significant warranties and indemnities from the sellers, leaving them with an ongoing potential liability. Warranty insurance is sometimes available.

By contrast, an EOT or vendor funded MBO or MEBO will often involve more limited warranties and relatively light due diligence.

What happens after the sale?

The post-sale experience as you might expect varies significantly.

Under an EOT:

• the trust becomes the majority shareholder.
• trustees oversee the board, with a majority required to be independent of the selling shareholders.
• the founder(s) can remain involved for a transitional period if desired.
• it will be important to start building an ownership culture which engages employees as owners.
• leadership succession will need to be planned if not already
• to show there is a financial advantage to employee ownership, it is recommended to pay income tax free bonuses to employees as soon as possible.

Under an MBO or MEBO:

• the new leadership team takes control and will likely wish to place their own stamp on the company and reshape strategy.
• for employee participation through a MEBO to be effective, employees will need to be engaged as with an EOT.

Under a trade and/or PE sale:

• the direction of the business will be led by the new owners
• founder involvement/workload will depend on the deal structure but often continues for a defined period as a condition of their earn out.

Choosing the right succession route for you and getting the right advice

Succession is not just a transaction. It is a defining chapter in the life of your business – and in your own life.

The right choice depends on your priorities:

• financial return
• legacy
• independence
• employee involvement
• speed and simplicity
• appetite for ongoing risk

If you are beginning to think about succession and would like to explore your options in confidence, we would be delighted to have an informal conversation with you. Contact us to speak with one of our trusted experts via our contact us page here.

Your next chapter deserves careful planning.