Succession Planning: Sale, EOT or Management Buyout

Succession planning starts with a personal decision. Do you want the highest possible price, a clean exit, continuity for employees, a continuing role, or a balance of those outcomes?

A third-party sale, an Employee Ownership Trust and a management buyout can all transfer ownership. They do not transfer value, control and risk in the same way.

The headline valuation is only one figure. The amount paid at completion, the source of future payments, the tax position and the seller’s continuing exposure can matter just as much.

Who this applies to

• SME owners considering retirement or a gradual step back.
• Founders who want to preserve the company’s independence and culture.
• Manufacturing and engineering businesses with an established management team.
• Shareholders comparing an external buyer with an internal succession route.
• Accountants and advisers helping clients prepare for a change of ownership.

Start with the outcome you want

Before choosing a structure, write down the outcomes that matter to you. Rank them. A route that protects one priority may require compromise elsewhere.

• How much cash do you need at completion?
• How much deferred payment risk are you prepared to accept?
• Do you want to leave immediately or remain during a transition?
• Should the company remain independent?
• How important is continuity for employees, customers and suppliers?
• Does the management team have the capability and appetite to lead?
• Can the business support acquisition debt or deferred consideration?

GOV.UK distinguishes between selling an entire shareholding and a company selling part of its business. The legal and tax consequences differ, so the transaction perimeter must be clear from the start. Its guidance summarises an owner’s responsibilities when selling a limited company.

Option 1: a third-party sale

A third-party sale transfers shares to an external buyer. The buyer may be a competitor, a customer, a supplier, an investment group or another company entering the market.

An external buyer may have access to more capital than an internal buyer. A strategic buyer may also place value on market access, intellectual property, specialist staff or production capacity. That does not guarantee the highest price or a cash-only deal.

The consideration may include:

• Cash paid at completion.
• Loan notes or deferred instalments.
• An earn-out linked to future performance.
• Shares in the acquiring company.
• Retention of part of the price against agreed risks.

The buyer will normally carry out financial, tax, legal and commercial due diligence. The sale agreement may contain warranties, indemnities, restrictive covenants and completion adjustments. The seller should understand which risks end at completion and which continue afterwards.

When a third-party sale may fit

• The owner wants to test the business in the wider market.
• There are credible trade or financial buyers.
• Cash at completion is a high priority.
• The owner is comfortable with a change in culture or strategic direction.
• The business can withstand a detailed sale process and buyer due diligence.

Option 2: an Employee Ownership Trust

An Employee Ownership Trust, or EOT, acquires a controlling interest in the company and holds it for the benefit of eligible employees. The employees do not usually buy the shares personally.

The EOT must satisfy detailed statutory conditions. These include the trading requirement, all-employee benefit requirement, trustee independence requirement, controlling interest requirement and limited participation requirement. HMRC’s EOT conditions guidance lists eight relief requirements.

Control means more than holding a simple majority of shares. The trustees must generally hold more than 50% of the ordinary share capital, voting rights, distributable profits and assets available on a winding up.

For disposals on or after 30 October 2024, additional rules require UK-resident trustees, trustee independence and reasonable steps to ensure the consideration does not exceed market value. The Government’s EOT reform guidance explains those changes.

How an EOT purchase is funded

An EOT does not normally begin with enough cash to buy the company outright. The purchase may be funded through existing company cash, external borrowing, future company contributions to the trust and deferred consideration owed to the seller.

This makes affordability central. A valuation of £4 million does not mean £4 million is available at completion. The company must retain enough working capital to trade, invest and absorb weaker periods while funding the purchase.

Our separate guide explains how an EOT pays the founder, including company contributions and deferred consideration.

When an EOT may fit

• The owner values independence, employee continuity and legacy.
• The business has stable cash generation and can support deferred payments.
• There is a capable leadership team beneath the owner.
• The seller accepts that part of the price may be paid over time.
• The statutory conditions and governance model can be maintained after the sale.

An EOT is not simply a tax structure. The trustees must act independently, the company needs an effective management team and employee ownership should be reflected in the governance and communication of the business.

Option 3: a management buyout

A management buyout, or MBO, occurs when members of the existing management team acquire a significant ownership interest in the business. The buyer is known to the company, but the transaction still needs independent scrutiny and formal documentation.

An MBO may be financed through management investment, acquisition debt, private equity and deferred consideration from the seller. The British Business Bank’s private equity guide identifies a management buyout as a transaction in which the existing management is the buyer.

The management team needs to demonstrate that it can lead the company, invest its own capital where required and work with lenders or investors. The business must generate enough cash to meet its normal commitments and the acquisition funding.

When an MBO may fit

• The management team wants direct ownership and control.
• The owner trusts the team to continue the business.
• The company has cashflow that can support the funding structure.
• Management and external funders can agree the future strategy.
• The seller accepts any deferred payment or vendor loan risk.

Continuity is a strength, but familiarity should not replace diligence. Management must understand the debt, governance and personal financial commitments it is taking on. The seller must assess the credit risk of any deferred amount.

Sale, EOT and MBO compared

Factor	Third-party sale	Employee Ownership Trust	Management buyout
Buyer	External trade or financial buyer	Trustees for eligible employees	Existing management, sometimes with investors
Price setting	Negotiated through a market process or direct approach	Independent valuation, with consideration not exceeding market value	Negotiated with management and funders
Typical funding	Buyer cash, debt, shares, earn-out or deferral	Company cash, debt, future contributions and vendor deferral	Management equity, debt, private equity and vendor deferral
Cash at completion	Can be substantial, but depends on deal terms	Often limited by available cash and borrowing capacity	Depends on management capital and external funding
Seller’s future exposure	Warranties, indemnities, earn-out and retained amounts	Deferred consideration and continued company performance	Vendor loan, deferred consideration and business performance
Continuity	Depends on the buyer’s plans	Business remains independently owned for employees	Existing management becomes the owner

The 2026 tax position

Tax should be modelled after the commercial structure is clear. A share sale, an asset sale, an earn-out and a deferred payment can produce different tax consequences and payment dates.

Third-party sale or MBO

An individual selling shares may realise a chargeable gain. From 6 April 2026, the main Capital Gains Tax rates for individuals are 18% and 24%, depending on taxable income and gains.

Business Asset Disposal Relief can apply an 18% rate to qualifying gains, subject to detailed conditions and a £1 million lifetime limit. The owner, company and shares generally need to meet relevant conditions for at least two years. Current rates and conditions are set out in the Business Asset Disposal Relief guidance.

EOT disposal

For a qualifying disposal to an EOT on or after 26 November 2025, 50% of the gain is treated as the seller’s chargeable gain. The remaining 50% is held over and deducted from the trustees’ acquisition cost.

Business Asset Disposal Relief and Investors’ Relief are not available on a disposal where EOT relief is claimed. The Government’s EOT relief reduction guidance explains the change.

The tax calculation depends on the seller’s base cost, losses, annual exempt amount, income and other disposals. Relief can also be affected if the statutory EOT requirements are not met. Obtain advice using the actual facts before signing transaction documents.

Prepare the business before choosing the route

Succession planning works better when the business can operate without the owner. That preparation benefits all three routes.

• Produce reliable monthly management information and cashflow forecasts.
• Document key customer and supplier relationships.
• Confirm that contracts, intellectual property and property rights sit in the correct entity.
• Resolve old shareholder, employment and tax issues where possible.
• Review borrowing, security and personal guarantees.
• Build a management team with clear authority and accountability.
• Separate one-off or personal expenditure from normal trading performance.
• Prepare a realistic valuation supported by maintainable earnings and cash generation.

A clean business is easier to value, finance and transfer. It also gives the owner more than one credible option.

Worked example: three routes for a £4 million company

A manufacturing company has an agreed illustrative equity value of £4 million. The founder owns all the shares and wants to step back. The figures below ignore tax, interest, fees and price adjustments so the funding differences remain clear.

Third-party sale

The buyer offers £3.4 million at completion and a £600,000 earn-out over two years. The founder receives 85% of the price immediately. The final 15% depends on the agreed performance conditions and protections in the sale agreement.

Employee Ownership Trust

The EOT pays £800,000 at completion using cash made available within an affordable structure. The remaining £3.2 million is deferred over six years and funded from future company contributions. The founder receives 20% at completion and remains exposed to future company cash generation for the balance.

Management buyout

Management invests £400,000 and secures £1.6 million of acquisition funding. The founder receives £2 million at completion and accepts a £2 million vendor loan repayable over five years. The business must service the external funding and vendor loan while retaining enough cash to trade.

Each route uses the same £4 million valuation. The liquidity, repayment period, conditions and seller risk are materially different. Those differences should be modelled alongside tax before a route is selected.

Lexmore’s View

Do not choose a succession route from the headline tax rate alone. Start with the owner’s objectives, the management team and the company’s ability to fund the transaction.

Clear objective. Clear funding. Clear exit.

How Lexmore can help with succession planning

Lexmore advises SME owners on Employee Ownership Trusts and the tax implications of business succession. We can compare the EOT route with a third-party sale or management buyout, model the tax position and work alongside your accountant, solicitor and corporate finance adviser.

Where an EOT is the chosen route, we support the transaction from initial feasibility and tax analysis through to implementation. Read more about our Employee Ownership Trust service.

References

• GOV.UK: Sell or transfer your business
• GOV.UK: Selling a limited company
• GOV.UK: Business Asset Disposal Relief
• GOV.UK: Capital Gains Tax rates and allowances
• HMRC: Employee Ownership Trust relief reduction
• HMRC manual CG67820: EOT relief requirements
• HMRC: Changes to the taxation of EOTs
• British Business Bank: Private equity and buyouts