Exit strategies for business owners: EOT or MBO?

23 May 2025 | posted in Corporate and business law

This insight is part of our Legal Business News | Spring 2025 series. Explore the full series at the end of this piece.

As a business owner, planning your exit strategy is crucial for ensuring the future success and sustainability of your company. Instead of a traditional third-party sale, two popular alternative exit strategies are employee ownership trusts (EOTs) and management buy-outs (MBOs).

Both EOTs and MBOs still involve a sale and each has advantages and disadvantages, which we explain here. Understanding these options helps you make an informed decision.

Employee ownership trusts (EOTs)

What is the EOT model?

In simple terms, an EOT is a trust established for the benefit of a company’s employees that buys a majority of the shares in the company. The EOT then holds the shares for the benefit of all employees collectively. Introduced in the UK in 2014, EOTs offer significant tax advantages and help preserve the company’s culture by aligning employee interests with business success

Advantages of EOTs

Tax benefits: For business founders, one of the most attractive features of an EOT is the ability to sell the company without any capital gains tax liability, providing certain conditions are met. Employees can also receive tax-free bonuses of up to £3,600 per year.1
Legacy: EOTs create a lasting legacy and preserve business continuity by ensuring the long-term sustainability of the business, maintaining its culture and values.
Employee engagement: EOTs enhance employee engagement and morale, as employees essentially, but indirectly, become co-owners of the business, with a vested interest in the company’s success. This also aids recruitment and retention.
Fair market exit: Selling shareholders receive a fair market value for their shares, and the transaction can be structured to provide payment of this value over time.
Financial: The employees do not finance the acquisition, so there is no requirement for them to personally pay for any shares. Instead, the trust’s payment for the shares can be funded by profits of the business. In an EOT transaction, part of the purchase price payment is normally made on completion of the transaction, with the balance being paid over an agreed period of time following completion.

Disadvantages of EOTs

Complexity: Setting up and running an EOT is complex and requires significant legal, accounting, financial and tax advice.
Deferred payments: Selling shareholders receive a proportion of the purchase price on completion of the transaction. Much of the purchase price is paid from future profits of the business, so it must remain profitable to fund the deferred consideration payments.
Control: The EOT must become a controlling shareholder. This may mean that founders need to sell more shares than they would like.
Not suitable for all businesses: Where key individuals value direct share ownership of the business, EOTs are not the best fit.

Management buy-outs (MBOs)

What is an MBO?

An MBO is a more traditional and well-established exit route, where a company’s senior management personally buys the business from the current owner. This is often used when the management team believes in the company’s potential and wants to take control.

Advantages of MBOs

Continuity: MBOs help ensure continuity, as the existing management team, familiar with the business operations, takes over the ownership of the business.
Motivation: Management teams are highly motivated to succeed, as they now have a personal ownership stake in the business.
Speed: MBOs can often be completed more quickly than other types of sales, such as a sale to a trade buyer, due to the management team’s familiarity with the business.
Flexibility: MBOs are not subject to strict rules that EOTs are, so there is flexibility regarding how the transaction is structured.

Disadvantages of MBOs

Financing: Securing finance for an MBO is sometimes challenging, especially if the management team lacks sufficient personal capital. The management team may be asked for personal guarantees for any external finance.
Risk: The management team takes on significant financial risk, which can be stressful and can impact their decision-making.
Potential conflicts: There can be potential conflicts of interest if the management team is negotiating the purchase while still employed by the company.
Exclusivity: In an MBO, the buyers are confined to a small number of key individuals.

Making the right choice

Choosing between an EOT and an MBO depends on various factors, including your business’s financial health, your goals and your management team’s preferences. EOTs offer significant tax benefits and help preserve the company’s culture and legacy, while all employees share in the rewards of business ownership. MBOs provide continuity and motivation for the management team.

Both EOTs and MBOs provide a successful exit route and both come with their challenges. Understanding their key differences and potential pitfalls helps you make an informed decision.

Help from the experts

It is essential that you seek professional advice to ensure you choose the best exit strategy for both you and your business.

At Moore SGD Law, our specialist lawyers understand the challenges you face as a business owner. Working closely with our tax, accounting and finance colleagues at Moore Kingston Smith, we deliver integrated support to meet your legal as well as your wider commercial needs. Contact us for further guidance on exit strategies for business owners.

This article is provided for information purposes only. It does not constitute legal advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.