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07th July 2020

Alternative Deal Structures.

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Even before the COVID-19 pandemic, the corporate team at Hewitsons had noticed that business owners were increasingly looking at different ways to release the value in their companies. Now, given the current economic situation, we see this trend accelerating, especially in those sectors where trade buyers are scarce or more conservative in their purchase price offers.

This article considers two alternative deal structures that are available to business owners: employee ownership and management buy-outs.

Employee Ownership


Employee Ownership Trusts (EOTs) have already experienced a surge in popularity in the previous couple of years. The structure involves the EOT acquiring a 51% (or greater) stake in the company, and this is a very tax efficient exit option for the Seller as there is no capital gains tax (CGT) charge. Companies controlled by an EOT can also pay £3,600 tax free bonuses to employees each year.

In addition to having a ready buyer and benefitting from tax advantages, this exit option is attractive to business owners who do not want to see a change in culture that often follows with a sale to a third party. Sellers may also prefer to exercise a greater degree of control over the transaction, which this option provides.

The purchase price paid by the EOT will usually be ultimately funded (whether in the short or long term) out of the profits of the company. Along with any surplus cash reserves, bank funding is often sought by the EOT or the Company to fund the up-front payment, with deferred elements being paid out of the future profits of the company.

Management Buy-Outs


Management Buy-Outs (MBOs) have for many years been an attractive option to business owners looking to realise value out of the company over a 3 to 5 year period in a tax efficient way.

The structure of an MBO, in its simplest format, is for the controlling shareholder(s) to sell their shares to the existing management team, and in most cases this involves the management team setting up a new holding company which then assumes control.

In a similar way to an EOT sale, an MBO can avoid some of the disruption that a trade sale brings. As the new owners will be familiar with and to the company, its staff, contacts and clients, both internally and externally, the perception that it will be business as usual helps to allay common concerns.

Another advantage is that the sale process is often less onerous for the sellers. Due diligence can be reduced, with management taking the lead in providing access to any information required by external funders. MBOs should also lead to sellers giving less onerous warranties and indemnities in the relevant sale documentation.

Funding an MBO will clearly be an issue, and whilst the management team is often asked to introduce some personal funds, in most cases additional funding will be required. Sometimes this is provided by institutional lending or leveraging against the assets of the company. Other common funding structures involve Private Equity funding and vendor finance, either in the form of deferred consideration or vendor loan notes.

Vendor loan notes


Finally, on the topic of vendor loan notes, we are also seeing an increasing trend in their use following tax changes reducing the Entrepreneur’s Relief lifetime limit from £10 million to £1 million. Previously, on a sale where there was significant deferred consideration (whether trade sale, MBO or otherwise) sellers would want to maximise the use of their lifetime ER allowance by paying all CGT upfront. However, now, where the ER limit is less generous, loan notes give sellers the option of deferring payment of CGT on deferred consideration until such time as the consideration is actually paid.

In summary, business owners looking to realise an exit should be aware that they have a variety of options available to them. Whatever the type of transaction, the Hewitsons corporate team has extensive experience in each, and will be able to guide you through the process from start to finish.

For further advice about any of these options please contact Laurence Evans on 01223 532710 or at laurenceevans@hewitsons.com or a member of Hewitsons Corporate team.