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Equity 3 Ways

Updated: Jun 29, 2022

3 Common Ways to release your hard earned equity...

When selling your business on the open market you can expect a proportion of the sale proceeds on day one, and any earn-out can be negotiated to maximise your position.

If your sector and business model commands higher-than-average valuations, the uplift could offset your tax bill.

On the downside, selling to a third party is an adversarial process involving managed exposure to competitors. If businesses in your sector are only attracting average valuations, the tax advantages and simplicity of selling to an Employee Ownership Trust could prove advantageous from the outset.

Employee Ownership Trusts (EOT’s) can deliver a tax-free and ethical way to release your hard-earned equity. Alongside selling on the open market, EOT’s are becoming increasingly popular achieving 21% average growth year on year since 2018.

EOT’s are highly flexible, as you can start to release your equity now, and continue serving as a trustee, director, or employee, allowing you time to strengthen your management team, ensuring your employees are left with a strong and thriving business.

Negatives include waiting longer for your money and more risk, as deferred consideration is tied to the business moving forwards. For many the ethical positives, outweigh the negatives, as your company’s unique culture and values are preserved as a legacy. Employees qualify for a £3,600 tax free bonus and are more likely to retain their jobs when compared to a merger with another company. Studies have shown that employee-owned businesses are 7% more efficient and productive as employees transition from spectators to participators.

Employee ownership trusts allow you to dictate the terms of the transaction to suit your situation. You still get all the benefits of having sold your business and more, including getting your time back, but you also get to ensure your business is heading in the right direction before saying goodbye completely.

Employee ownership trusts particularly suit companies with strong future cash-flow which, is used to fund the acquisition. In addition to significant tax savings, departing shareholders can charge interest on any outstanding consideration and leverage a bonus payment through warrant options.

For some, a management buyout can be very attractive, especially where some shareholders wish to remain with the business, making it easier to secure funding. However, it's worth remembering that departing shareholders are faced with a Capital Gains Tax bill and acquiring managers who aren't already shareholders may struggle with funding, especially in asset light businesses. In these cases an EOT, or sale on the open market may be better options for you and your business.

Keep your options open, using our combined service…

In some instances, businesses may benefit from being part of a larger organisation that is able to offer employees career progression and is able to take the business to the next level. However, corporate culture isn’t for everyone, and employee ownership can preserve a company’s unique identity and ethics while maintaining a similar growth trajectory.

Our combined service allows vendors to explore a trade sale first, with the option of switching to employee ownership later should a trade sale fail to meet expectations.

Unique to exitbydesign, the Combined Service is fast and efficient, delivering a 98% rate of success. Our Combined Service allows you to switch to employee ownership seamlessly, without incurring additional fees.

Call us on 01384 274 778 / 075 888 925 88 to discuss or go ahead and book a free consultation to discuss your options.


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