What do I need to know about buyouts and Employee Ownership Trusts?

16/11/2020

There are many different ways in which a business can be acquired, and there are several key ownership structures that businesses follow, but what do you need to know about buy-outs and Employee Ownership Trusts?

A buy-out occurs when a buyer acquires more than 50 per cent of a company, leading to a change in control. There are many different types of business acquisition, including management buyouts (MBOs) and more recently Employee Buyouts (EBOs).

Leveraged buyouts

A leveraged buyout is simply the term that is used when a significant amount of money used to complete the buyout is borrowed money, often involving the assets of a company being acquired and being used as collateral for the loans.

The company that is performing the leveraged buyout may provide a modest percentage of the capital, with the remainder being financed through borrowed money. This is often considered a relatively ‘high risk, high reward’ strategy, with the acquisition having to achieve sufficient returns to service the debt.

Management buyouts

Management buyouts are transactions in which the management team of a company purchases the assets and operations of the business they manage and offers greater potential rewards through increased control for the management team.

An MBO is often seen as a good exit strategy for owner managed businesses that are looking to retire or simply move onto another venture.  Similarly a management buyout can often work well for larger companies that are looking to divest parts of the business that do not form the main portion of their core business.

The financing required can be significant, with this usually coming in the form of debt and equity from buyers, financiers and sometimes from the seller themselves in the form of deferred payments.

What about ownership structures?

There are several different ownership structures, with the most popular being the use of a limited company to make the acquisition.

However, one key differences with an Employee Buyout is that the typical model of ownership is an Employee Ownership Trust (EOT), in which the majority of a company’s shares are owned by a trust, collectively, for the benefit of the company’s employees.

This structure offers many benefits, both social and financial, with a number of tax incentives available.

EOTs were introduced in the Finance Act 2014 and promote employee ownership as a business model.

The major tax exemptions are:

• An income tax exemption of £3,600 per tax year on certain bonuses issued to all employees (national insurance contributions are not exempt)
• A capital gains tax exemption on gains made when a controlling interest in a company, or parent company, is sold to an EOT

How can WMT Chartered Accountants help me?

Establishing the right buyout method is essential to your success. By selecting the format that suits your needs, you can build a platform for future growth and prosperity.

Whether it is a management buyout, a leveraged buyout or if you’re looking to establish an Employee Ownership Trust, our expert team at WMT Chartered Accountants can help guide you through the process.

For help and advice on matters relating to buyouts and employee ownership trusts, contact Andrew Williamson or our expert team at WMT Chartered Accountants today.