EOT vs MBO: Choosing the Right Ownership Transition

For business owners planning succession or an exit, Employee Ownership Trusts and Management Buyouts are often compared as alternatives to a trade sale. Both routes can preserve continuity, protect jobs, and keep a business independent. However, they are fundamentally different in how they operate, how they are funded, and how value and control transfer over time.

Choosing between an EOT and an MBO should never be driven by historic tax assumptions or adviser preference. It should be based on commercial reality, governance, funding capacity, and long term objectives. This has become increasingly important as the EOT regime has tightened and the tax treatment has evolved.

An Employee Ownership Trust is a long term ownership structure where a controlling interest in the company is held on behalf of all employees. Since its introduction in 2014, the model has matured significantly, and HMRC expectations are now far clearer. An EOT must acquire more than 50 percent of the ordinary share capital, voting rights, and entitlement to profits, and it must operate for the benefit of all eligible employees on broadly equal terms, subject only to limited statutory variations.

Recent legislative changes and HMRC guidance have made it clear that EOTs are no longer a simple route to a tax free exit. While reliefs may still be available in certain circumstances, Capital Gains Tax outcomes now depend on the structure, timing, funding mechanics, and ongoing compliance of the trust. HMRC scrutiny is higher, and transactions that appear tax led rather than commercially driven are increasingly challenged.

As a result, EOTs should now be viewed primarily as ownership and succession solutions rather than tax planning tools. When structured and operated correctly, they can still provide an effective and orderly transition, but the tax outcome can no longer be assumed.

A Management Buyout, by contrast, is a more conventional sale where some or all of the existing management team acquire ownership of the business. This is achieved through a negotiated transaction, typically involving a mix of personal investment, external funding, and deferred consideration. Capital Gains Tax will normally apply to the selling shareholders, subject to any available reliefs.

MBOs work best where there is a strong, credible management team with the ambition and capability to step up as owners. Control passes directly to that team, and the seller exits either immediately or over an agreed transition period. The clarity of ownership can be attractive, but it also concentrates financial and operational risk within a small group.

Funding is often the decisive factor when comparing an EOT with an MBO. In an EOT transaction, the purchase price is usually funded from future company profits rather than significant upfront borrowing. This can reduce immediate financial pressure on the business, making EOTs more suitable for profitable, cash generative companies with stable trading histories.

MBOs typically rely on external finance, whether through bank lending, private equity, or vendor loans. This often results in higher leverage after completion and may expose management to personal guarantees or equity risk. The key issue is not which route looks more attractive on paper, but which funding structure the business can realistically sustain without undermining performance.

Control and governance is where the two routes diverge most clearly. In an EOT, control passes to the trust rather than to individuals. Governance is exercised through trustees, typically a combination of independent trustees, employee representatives, and sometimes the former owner. Day to day management remains with the directors, but strategic oversight sits with the trust.

In an MBO, ownership and control pass directly to the management team. This can be empowering and decisive, but it also concentrates responsibility and exposure. Owners who want to step back gradually and preserve influence often favour EOTs, while those seeking a defined handover to a specific team may prefer an MBO.

Employee ownership is often chosen for cultural reasons as much as financial ones. A well implemented EOT can preserve independence, protect jobs, and foster a stronger sense of shared responsibility across the workforce. However, EOTs are not automatic culture fixes. Without education, engagement, and disciplined governance, employee ownership risks becoming symbolic rather than meaningful.

MBOs, by contrast, reward a smaller group of individuals. This can sharpen leadership focus and accountability, but it does not extend ownership benefits to the wider employee base.

Tax still matters, but it should no longer dominate the decision. The historic assumption that EOTs deliver guaranteed Capital Gains Tax free exits is outdated. Today, tax outcomes are a consequence of structure and behaviour over time, not a headline benefit.

An MBO may appear less attractive from a tax perspective, but in the right circumstances it can offer greater certainty, clearer alignment, and a cleaner transaction. There is no universal answer.

An EOT is often well suited to profitable, people based businesses with strong management teams, owners who value legacy and continuity, and a desire for a gradual transition. An MBO is often more appropriate where management ambition is clear, funding is available, and the owner wants a defined exit with identifiable buyers.

What matters is choosing a structure that works commercially, operationally, and culturally over the long term. Both EOTs and MBOs are complex transactions with lasting consequences. Getting the structure wrong can create tax risk, governance problems, or financial strain that only becomes apparent years later.

At EOT.co.uk, we help business owners assess whether employee ownership is genuinely appropriate under the current rules and expectations. Where it is not, we are clear about that and explore alternative routes, including MBOs and other succession options. The right ownership transition is the one that still stands up to scrutiny long after the deal is done.

Contact us today to discuss if an EOT is right for you.