Transcript
Garry Karch
Hi, my name is Gary Karch and I’m the head of the EOT practice at Doyle Clayton. We’re a law firm based in London, Reading and Bristol that has a very strong EOT advisory practice, probably one of the most experienced in the UK and I’m here with my colleague Akshay Vaghela, who will introduce himself.
Akshay Vaghela
Hello, I am Akshay Vaghela and I’m the EOT Services Director here at Doyle Clayton’s EOT practice. I’ve been working with the firm since September 2024 and today, we’re going to be discussing the pros and cons of selling your business to an Employee Ownership Trust or as they’re more commonly known, an EOT. So, you know, I think to my mind there are at least around 5 main pros to selling your business to an EOT. What do you think, Gary?
Garry Karch
Yeah, I think that’s right. You know, I think depending on how you want to slice and dice, you can probably come up with more or less but, I think as we look at it and as we talk with potential clients, there are really five major areas that they’re typically concerned about and they ask questions about. First is valuation. You know they want to receive a fair value for their company. They like the idea of selling, through an EOT structure to the staff but they also in most cases have worked hard to build their businesses after they either started or bought them and they don’t want to sell at a discount. So, I think you know being able to get a fair value is certainly a big concern and it’s actually something that can be achieved with an EOT. I think that’s definitely one of the pros.
Second is getting paid at a tax advantage rate with an EOT, which is the case and we’ll get more into that. This has changed recently with the November of 2025 budget announcements in terms of how these are taxed, but it’s still a very advantageous structure for vendors.
Three, if anyone has ever gone through an attempted sale of their company to a third party, they will know what stress looks like. Those are incredibly high stress transactions. They’re a 0-sum game. There’s a winner and there’s a loser. When you have an adversarial sale transaction, the EOT is a low stress transaction compared to the other alternatives.
Forth and this is interesting. I think when you think about your legacy and selling your company, most people always focus on value and getting the most they can for their business. We find a lot of our clients are much more concerned about their legacy, what their business has meant and hopefully will continue to mean for their community and for their staff. So that’s a real positive. I think that’s a pro that the EOT brings to the table and then finally, the big question, especially if you’re going to be owed money and paid out over time, is the control issue. For an EOT to, you know, generate the CGT relief that it does. Control of the business technically does have to pass to the EOT. Now there’s a difference between share control and day-to-day operating control of the business and as we get into this, I think what you know will lead you to conclude is that day-to-day operating control remains within the purview of the company board, the trading company board, but it does have a light oversight partner in the EOT trustee board. I think those are the five majors and it’s an important point I think with control because you know actually I don’t know what you think about this but most of our clients are not 65 or 70 years old looking to walk away the day after this completes.
Akshay Vaghela
No, no, exactly. There’s a common demographic and most of our vendors tend to be, you know, 40 plus I would say and then you know, there are, we sort of deal with a range of them, some that are sort of ahead of the game in terms of, you know, being at that age, still having a lot of life left in terms of how much energy they can give the business but also focusing early on their exit route and they care about legacy. So EOTS are great and then obviously we do have a slightly older demographic of people that are sort of looking for a solution to a problem they haven’t addressed for a while and they’re the sort of age ranges we deal with.
Garry Karch
Yeah, I think it’s really important because when you look at the transaction immediately post completion, everyone wants to get off to a good start. The vendor wants to make sure that you know the initial payments are going to be made so they get comfortable that the business is going to continue to perform regardless of their role post completion, but it also then gives them time. If there’s not successor management in place, it gives them time while they’re still involved in the day-to-day management of the business to bring that next generation of management along.
So they’ve got that flexibility. There’s no deadline by which they have to be out. So, they can step back once they start to feel comfortable that the company is in good hands and that to me is a real strength of the control provision where they can stay involved, they don’t have to walk away and it’s good for everybody.
Akshay Vaghela
Absolutely. Like you say, some businesses haven’t built that team yet, haven’t built the people that might step into the owner’s shoes. Some clients are already in that position. They’ve built the team and so control post EOT is not as important, but it always is and then you have other clients who haven’t built that team and they use the sale to kickstart that process of building the team, a range of clients at different times, but there is sufficient control remaining with the vendor to continue on that front and have the control they need to guarantee that their payments are going to be made in the future.
Garry Karch
Completely agree, completely agree. Let’s go ahead and start going through the pros maybe individually in the order that we talked about. So first would be getting fair value for your company.
Akshay Vaghela
Sure. Look, there is a myth around the market that, you know, if you do sell to an EOT, you might get a lower value. That’s not always the case. I mean generally third-party sales, private equity, you might get an extra turn or 1/2 a turn of EBITDA but the point is the principles are the same. So, when we’re looking at an EOT and we’re looking at value in the company for the sale, the same principles in terms of valuation apply. We’ll always look at a company’s financial performance, history, the accounts and any adjustments to normalise what we’d call earnings or EBITDA and then applied to EBITDA would be a multiple and that multiple is usually based on the sector within which that company operates. For the SME market, you’re normally looking at multiples between 4 and 7, 4 being the floor and 7 being the ceiling for your companies that are in in industry such as IFAS, that generally tend to trade at a higher multiple. We have seen higher than seven for those kinds of industries as well but generally the point is, the business is being valued in exactly the same way that they would be for any other purpose and that often leads to a really, really competitive value when compared with the other options and then with the tax relief coming in, our mantra is always, ‘focus on what you keep rather than what you get’. Don’t focus on what you’re going to get in terms of sale price, focus on what you’re going to keep in terms of NET proceeds in the pocket and because of the tax relief, which we’ll go into in more detail, the EOTS can be really, really valuable. What do you think, Gary?
Garry Karch
I agree and I think it really goes back to the commercial approach that we take with respect to EOT transaction. I think without having an anchor point in terms of value, it’s very difficult for a vendor to try to see whether or not an EOT makes sense compared to the third-party sale alternatives, whether it’s a trade buyer or private equity. Could you talk a little bit about the role of a feasibility analysis, in sort of helping that process along, and what that brings to the table?
Akshay Vaghela
Sure. So, in our opinion, in our view, feasibility analysis is absolutely key to any EOT deal. The first thing that it allows an owner to look at what the transaction would look like for them, both in terms of the value on offer and in terms of the repayment period and the cash flows of that business could generate in the future. It’s a really important starting point. It puts the owners in the hot seat essentially, they, sort of, see the deal, they can feel what it would look like and then the real questions start to come out. By the way, we offer this as a complimentary piece, so if anybody does want to, you know, dive into analysis, please feel free to reach out to myself or Gary.
The other thing that it does, and this is something that when we talk about value in an EOT, is when it’s commercially structured the right way, you can gain an extra benefit and that benefit comes from charging interest on what we call a vendor loan or deferred consideration. So, in many of these deals you don’t get your cash up front but you can take cash that you’ve pooled for a long time at a very favourable rate and also you’ll be waiting for an amount that the company will need to fund over time and you can charge an interest rate, and it’s been written into legislation following recent budget changes, that you can charge up to a commercial rate of interest. In one of our webinars, we did an example of a company that was selling for £5 million. The deferred consideration was of that amount and it was a 7% interest charge based on base rate, plus a spread of 3% to 4% and over the 6-year period/7-year period that that business was being paid out, that £5 million was being paid out, the interest accrual was almost £1 million. Now interest is taxable but when you compare the sales value to third party or private equity that can look competitive, when you add this interest element on top, I think that really swings the balance and provides real extra value that you don’t get in any other scenario.
Garry Karch
That’s a really good point and I think the other piece that I think is a value add with respect to the feasibility analysis. In the October 2024 budget changes, there was a requirement put in place that the trustees take reasonable steps to make sure they’re not overpaying for the company.
So, we don’t do the formal independent valuation because there’d be a conflict if we were doing advisory work and then did that kind of evaluation but by starting with that feasibility analysis, which does include an indication of value, you know where you’re going to end up. We do valuation work for other people as well, just not our own deals and I think when you look at that, you can say to a client with confidence that this is a number that an independent valuer is going to be able to justify and that provides the protection for the EOT trustees that they’ve complied with that legislative requirement that the trustee not overpay for the business.
Prior to that, there was a fiduciary duty for the trustee not to overpay. This is not legislative, you know, where, it says flat out you must take reasonable steps to make sure you’re not overpaying. So, if you start out at that point, looking at the value, you have a good foundation to move forward with a transaction. Assuming the rest of the parameters meet your objectives, because at the end of the day, it’s not the right deal for everyone and we understand that. But I think giving people the information they need to make an informed decision is really key to an EOT transaction, you know, make that informed decision and then you don’t look back. You’re confident that you’ve made the right call on that. I think that just really does provide an anchor to the transaction, you know you’re going into it knowing that this major variable has been sorted and that’s key, no surprises down the road. You’re not going to have a third-party buyer trying to re-trade you on price and just try to beat that down over the negotiations. So that’s I think a real strength.
The headline, and this goes back to, the 2014 budget for EOTS has always been the treatment of Capital Gains Tax (CGT) taxation and the reliefs available with an EOT structure. Can you talk a little bit about that and then particularly, what changed in November of 2025?
Akshay Vaghela
Sure. When the legislation came into force in 2014, one of the major, major benefits of this from a financial perspective was the fact that a sale to an Employee Ownership Trust, providing you meet all the criteria, was completely free from Capital Gains Tax.
Now, you know, for an individual to be able to sell an asset free from Capital Gains Tax is an extremely rare relief and that was the case for many years. For the 11 years, from 2014 until November 2025, everybody that sold to an EOT benefited from that tax-free sale. and that really did set the EOT apart. Now for the first time, that Capital Gains Tax treatment has been adjusted by HMRC. So, what HMRC have done is they have essentially cut the relief in half. So whilst you had a 100% tax-free sale before, you now have a 50% tax-free sale and the way that works and is the relief is written such that it will half the headline Capital Gains Tax rate when you sell to an EOT. The current headline rates are 24% and if you sell to an EOT, essentially 50% of that is exempt from charge and the other 50% is charged at 24%. So, to make that really simple, it’s an effective rate of 12% now and that has adjusted the nature in essence of the EOT and I think what it’s done is it’s meant that people don’t just look at the EOT for the tax incentive anymore. Yes, they do still get a huge tax incentive. That’s still the lowest rate on the market. You know, EOT relief at 12% is lower than business asset disposal relief, which is at 14%, going up to 18%, so it’s still extremely valuable. But what it does, it means that it’s a more unified approach coming into an EOT sale. A vendor really wants the benefits for the staff as much as they want the tax advantage income from it.
Those are the key changes and there are sort of some implications that have arisen as a result of that. So, now a consideration when selling to the EOT is timing of the tax payment. So typically, Capital Gains Tax is payable on the 31st of January following the end of the tax year in April. So, if you sold to an EOT in, you know the current tax year 2025/202626, which ends in April 2026, you’d have to pay your CGT liability by January 2028.
So that’s obviously a lump sum based on the entire amount and in many circumstances, the payments that have come out at that point might not be sufficient to cover the tax. So, HMRC do offer the option to pay by instalments if it can be reasonably assessed that you can’t meet your tax liability upfront and there’s also other ways of managing it. So, if you know that you’d like to sell in the next few months, for example, we could make sure that the sale is in the end of April into the next tax year, which buys you almost another whole year’s worth of time to save up for that liability.
There are methods to manage it, negate it, but overall that change has not really affected the nature of the opportunity, the benefits that the EOT brings and with our experience since the change over the last four to five months.
We had many clients that were actually preparing for a tax free sale and then you know that week of the budget, the terrible budget. Five days later one of our clients, for example, went up from 0 tax to 4 million in tax, but it didn’t stop them from going ahead with the sale because they still recognize the benefits and still recognize
you’ve been in the space and been advising on these deals since the initial legislation came in. So, what impact do you think it’s had?
Garry Karch
Yeah, I I think it gave people pause for thought. I think everybody you know who was, you know, involved in the process, had one of those oh no moments and you know, we had a number of clients as you know that actually had us put together analysis for them. Showing what the impact was, and I think with maybe one exception, everybody has moved forward. They looked at and said this is still the right transaction. Just really quick, I think one thing, I think you meant to say the tax, if you did it, this should be due in January of 2027, rather than 2028.
Akshay Vaghela
Sorry, yes.
Garry Karch
I just wanted to make sure that we didn’t create too much breathing room for people on that one. But your point’s a very valid one. You can plan and manage the exposure and the timing of the Capital Gains Tax payments that that could become due. I think the other.
Garry Karch
Thing to consider when you look at this is a lot of clients and a lot of businesses, not just our clients, a lot of businesses do have quite a stockpile of cash on their balance sheets. They just have never taken the distributions other than enough to lead, you know, a nice lifestyle. But the businesses have traded profitably, they’ve built up a lot of cash and if they were to pay dividends, they’d be paying almost 40% above their allowance on the dividends that would come out of the company. That excess cash becomes part of the purchase price in an EOT transaction. So, rather than paying close to 40%, you’d be paying that 12% effective rate on cash that comes out of the business as part of the equity value with an EOT. I think that’s something that that we shouldn’t underestimate because there is a big difference between a 12% tax on cash you take and a 40% tax on cash you take. So, just another thought that sort of comes into the tax advantages of the EOT.
The big question we did get, you know, and you touched on this obviously, when do I have to pay it? Because you know the big, I think red stop button was if there is no way to potentially try to work something out with HMRC on deferring payments, I’m not getting a lot of cash at completion, my Capital Gains Tax payment could be £1 million. I’m getting nothing at completion. I’m paying the fees and then taking everything over time. That would be a non-starter for an EOT from my perspective, for a lot of our clients. If you had, no ability to try to negotiate an arrangement with HMRC, I think that, not to be a doom and gloom guy, that could have been the end of EOTS in the UK, from my perspective.
Akshay Vaghela
Yes
Garry Karch
People don’t have that kind of liquidity personally sitting around and again, this is a personal tax obligation. That’s a really important point. T his relates to the vendors having to pay Capital Gains Tax on the sale of their asset. I don’t know how many people you know, but I don’t know a lot of people that have, you know, a million or two sitting around in a bank account just waiting to pay Capital Gains Tax bills with it. I just don’t think that’s realistic and without the ability to negotiate, potentially a deferred payment arrangement, it would have been, I think, a disaster for the EOT sector.
Akshay Vaghela
Absolutely. Luckily the tax legislation had a provision in there for a while that has allowed people to agree payment arrangements and thank God for that because if without it, like you say, it could have been a non-starter for certain people. But really look, to clarify what I said earlier, you’ve got either until the January following the end of tax year. If you want to extend that, you can complete in the next tax year, give yourself another extra, it becomes a total of 20 months I believe if you, for example, complete on the 7th of April rather than the 5th of April.
So you can buy time that way, but you can access instalment arrangements and all HMRC want to know is look, can you reasonably pay the tax upfront? And if it’s clear that you can’t, then you can enter an instalment arrangement and there’s rules around it. The rules are that you’ll be receiving consideration payments over a period that is longer than 18 months. For most EOT deals we’re talking, you know, 4/5/6-year repayment periods, maybe a bit longer. So that box is kind of checked and the other rule is that under that arrangement that the full amount of tax due should be paid within 8 years. So, it fits the bill for an EOT and the way it operates in practice is, you would agree the arrangement HMRC, they would want to see the share purchase agreement or maybe a payment schedule just to show what you’re actually due to receive.
And then they will take 50% of every instalment you receive. So, if you received, if you’re going to receive £100k every quarter for the next three years, they would take 50% of that payment every quarter, until the tax is paid.
So, that’s kind of how the payment arrangement works and from a structuring perspective, there are many commercial reasons why you might not want to take, if you have got lots of cash in the company, that you might not want to take it on day 1 anyway because you might not be comfortable, for example, stripping all that cash out of the business. You might want to keep it there for working capital or for comfort.
You can also, arrange your payment schedule, decide your payment schedule in a way that the payments start slower and then gradually increase as you go, to de-risk stripping the cash and that could also support in some cases accessing a payment arrangement with HMRC.
Garry Karch
OK. All right. Thank you. I think moving along to our pros and it really relates to the stress level, of different types of transactions. With an EOT, and I think people sometimes underestimate the value of this, but you control as the vendor. Virtually all of the transaction variables. This is your deal. You’re not negotiating with someone across the table. It is not an adversarial transaction, where there has to be a winner and a loser in the buyer and seller confrontation. I think that is a big point because if you talk to someone who’s gone through a sale, even one that completed successfully, it’s not a pleasant process. You’re always going to have the buyer telling you what a great partner they’re going to be and how they’re going to be really easy to work with.
That might be the case once the transaction is done. Everybody’s in the same boat pulling together to achieve the same objectives. But to get to that point, it can be a tooth and nail battle. You’re fighting over value, you’re fighting over adjustments to profitability, you’re fighting over representation and warranties in the share purchase agreement and in fact, what you are guaranteeing as the seller to the buyer is true, as part of their due diligence process. So, it’s a very confrontational, very antagonistic process when you sell to a third party, even if you think you’ve got the best partner in the world. Getting to that point where they can be the best partner in the world is a very stressful, very stressful process. I think when you look at the EOT, the only variables that you’re not in control of through the process, and I hate to say it, one is a rubber stamp, but if you do it right, it is. It’s the transactions and securities clearance application with HMRC. In that you outline the transaction, the commercial logic behind the transaction and they will look at that and come back and say this is not an attempt at tax avoidance; therefore, you comply. We agree not to seek tax through a counteraction, as a result of this transaction for you. So, you are reliant on HMRC giving you that clearance. It’s not a requirement. It is for us and for our clients. Yeah, we do that for all of our clients because there’s no charge and they usually turn the clearances around in, you know, 2 to 4 weeks. It’s a very quick process and it gives you something in writing that says this is not tax avoidance. Therefore, we’re not going to come after you for tax on the transaction. Really important. The other thing that you’re not in control of is if you are large enough and can access third party finance and that’s typically businesses with £1 million to £1.5 million of EBITDA or operating cash flow to start with, you’ll get some interest from lenders potentially on borrowing, to support the transaction, you don’t control their credit process. Yes, that’s the other part where you’re kind of at their mercy. They want to get there. They get paid to put loans on the books, you know, so it’s in their interest to get there, but their credit processes, at all of these various institutions, whether it’s High Street banks, whether it’s, you know, call them challenger banks, whether it’s debt funds, they each have their process and their process has its own timing and you’re not going to change that timing. As much as you want to, as much as you might get frustrated, those are things you can’t control. You know what’s going to happen with HMRC, if it’s done right and you’ve got an advisor who’s been down the road, you’re going to get the clearance. That’s not an issue. With the lender, more and more of them do understand the EOT structure after, we’re going into year 12 now of the EOT structure but there are still some that do not. They don’t understand the structure. They don’t understand this is not a holding company subsidiary relationship between a Trust and the trading company. So, there can be some frustrations and some time lags as you go through and explain the transaction to multiple people at times within the within the lenders. So, those are the 2 aspects you don’t control in a n EOT, vendor finance deal. There’s really nothing that’s going to stop you from completing assuming you meet the requirements.
From the time you say go, until you get to completion because there’s nothing you can’t control during that process. That takes a lot of stress off the table, a lot of stress. So, I think that’s something that a lot of people may not think about because it’s sort of a softer type benefit, but it’s a benefit nonetheless, if you’ve ever gone down the road with a third party sale.
I think the other thing is, what’s important and you know again is it’s commercially focused people at times. I think you know we have a bias toward looking at value and maximizing value for our clients etc. But we have had a number of clients that have not felt like they needed to push value as far as they possibly could. They looked at the legacy that they wanted to leave and that can be in a smaller community where they’re a large employer. It can be through, taking care of their staff on a longer-term basis. Those factors are just as important to a lot of our clients as value. I mean, nobody wants to sell at a discount and they shouldn’t, they’ve worked hard to build what they have but when it comes down to that last few £100,000 or that last half, half multiple of EBITDA, half turn, we call it, of EBITDA, they aren’t that concerned about that. They look at it and say, yeah, we’ve made a good living. We’ve got enough money. This is great.
We can be flexible as the financing source. If we need to defer some of our payments, we can do that to make sure the business does well. That’s really important to them and I think that’s one of the benefits of the vendor finance deal as well is it gives them the flexibility to manage the process based on how the company performs, even post completion. Third party debt, you don’t have that latitude. So as much as you might want to leave a legacy, you still have mandatory principal and interest payments that you have to make with a third party lender and that sort of factor of I’m taking care of the company, the business and the community is a little harder to execute in that that situation because you don’t have control over whether you defer those payments or not. They’re due and if they aren’t made, the lender is going to have its own set of remedies that it wants to pursue. Doesn’t mean they’re going to put you into administration, but it may mean a restructuring with fees that go along with that, that type of thing. I think it’s been a pleasant surprise to me, having done this kind of work for almost 40 years now in the US and the UK, it’s been a pleasant surprise to see the focus that a lot of UK business owners do have of taking care of the people that help get them where they are and being cognizant of the role their companies play in the community where they’re located. I think that’s an important factor for a lot of our clients.
Akshay Vaghela
Absolutely. And even if I go back to my first experience 5 years ago of advising on an EOT, the first vendor that I dealt with was really not concerned about maximising value. They were just concerned about getting the value that they felt was fair and getting the business, you know, giving the employees who are the new owners and beneficiaries through the trust. Giving them a leg up to say, look, go grow the business, go for it. I’m not asking for the full 5 million. I’m asking you for 3, go ahead. That’s not very common but the point is, either way, you have almost two, two styles of vendors, ones that you know are willing to take a little hit on value to give the company the advantage, the employees advantage and you have some that quite rightly want the fair value for the business. But one thing that is common amongst both types is the fact that they want their business to succeed for the long term. They want the people that have been with them to build that company over the years.
To have a, you know, a safe place to work, a place to succeed. And they, you know, it’s their baby, it’s their life’s work a lot of the time. And that’s been really pleasant, you know, pleasant to see through advising on as many deals as we have that owners really care, really care about their businesses and the longevity of them. The EOT is great for that because you know, it means that it reduces the risk of a hostile takeover in the in the sense that once you sell to an EOT, there’s usually a 5 to 10 year period where it’s likely you’re not going to consider an offer, specifically in the first 5 years and you give them security as part of the exit. The employees get that security alongside the benefits and as you said, when it comes to control through that process with a vendor finance deal, you have so much control, you have the opportunity to say, don’t worry, we’ll defer payments if you’ve had a bad year.
Or a bad quarter and we can pick up the payments another time, once the profits increase or we’re doing exceptionally well, I can catch up. It gives the business breathing space as well, potentially in a vendor finance deal. So, you know, lots of control and, of course, on the topic of control generally, you can stay on the trading company board and run the business on a day-to-day basis. So, whilst you’ve crystallized the sale, you’re no longer the shareholder, for example, in 100% scenario, you can still run the business as you did previously with no change because the trustee board, which is the sort of new legal owner of the shares, it can’t tell you how to run the business. That’s not how the boards interact. It’s there as a light touch overseer. So, from a control perspective, Garry, you know, do you want to go into a bit more on how that works, the relationship between the two and how the trading company board still gives you a lot of control?
Garry Karch
Yes, I think when you look at that, the trustee board is there to make sure the business is managed in the best interest of the staff. You know, I think that if you start from that point and you say, “What does that really mean?”. Best interest has been defined in case law, over the years, to mean best financial interest. Which following that logic, is making sure that the business is operated to try to make a profit so it can keep people employed, keep paying them. I think that’s the overriding consideration for the trustee board. Communication is always going to be important, you know, if you’re the MD, if you are, even the sole member of the trading company board, it’s important that you keep the trustee up to speed on what’s going on at the business. We always recommend at least at a minimum the equivalent of an AGM, where you know you can review the company performance, talk about any challenges, talk about successes, Say here’s an area where maybe I could use some insight, depending on who you have serving on the trustee board, but it is not there to make or second guess the decisions that the trading company board makes. It will decide to buy the shares initially and that’ll be based upon the independent valuation. So, it’s important that the trustee directors do get to look at that, review it, ask any questions that they have and then if there is an offer to buy the business down the road, it will have to at the end of the day say yes to that offer. Now that offer will come into the trading company board just like any other offer. Trading company board would review that, make a recommendation to the trustee. and then the trustee will probably do its own due diligence. It may get a valuation done to make sure that it financially makes sense to do this but the other factor, and this is, sort of, where I think the real oversight comes in in protecting the staff, it needs to look at any transaction in terms of the impact on the continued employment and financial well-being of the staff. So, if you had a trade buyer that was coming in and basically wanted to buy the book of business and was going to make 85% of the staff redundant, it would be really hard for the trustee to say that that is in the best interest of the beneficiaries to do that. So, there’s sort of that more subjective part of the decision process that the trustee has to make, but that’s part of their role as the overseer and looking out for the best financial interest of the staff. Now the trading company board, you would hope, would exercise that same type of judgment and say, look, we got this deal that looks really good financially, but o ur staff is going to be decimated post completion We’re a major employer in our community, these people have been with us for 20 plus years on average. It’s hard to say that that’s in anybody’s interest from both the trading company perspective and a trustee perspective, but it starts with the trading company. They will always be the first port of call for any business decision and then there will be in their judgment times, they’ll say, “yeah, let’s run this by the trustee board”. There’ll be other things that they will not need to run by the trustee board but there’s a fine line I think that you need to make sure you maintain because the risk to a trustee director is if they start, and I use this term purposefully, if they start meddling in the day-to-day operation of the trading company and things go wrong, they could be deemed directors of the trading company, and anything that might come back to haunt the trading company board directors could then come back to haunt the trustee company directors if they’re deemed to be, in reality, a director of the trading company, so you want to maintain that line, maintain the oversight, but let the company management the business, I think that’s really important.
I think finally then let’s turn to the cons, because like everything in life, everything is not always positive with any OT compared to a different sale alternative. So, can you talk a little bit about that, Akshay? I mean it works for most businesses, but there are considerations that really do come into play as to whether or not this may be right for you.
Akshay Vaghela
Yeah, absolutely. I mean, cons wise, like I said, there’s so many positives but I suppose if you’re doing a direct comparison between an EOT and other sale routes, I suppose the first con that comes to mind is you don’t get all of your money on day one. With a third-party sale, you might have an agreement to receive 65%-70% of the money on day 1 and then you might have to work a couple of years and earn the rest of the deal value and if you perform well, you might get some. We’ve seen countless times that, an owner’s got their 70% in a trade sale. They’ve got 3 years to work and those years quite not good to plan. They don’t get the full value they wanted.
With an EOT sale, the only risk is, well, you don’t get your cash on day 1. You’ll get whatever cash you’ve had on the balance sheet. You can take that on day one, and then you’re relying on the business to be profitable and to generate the rest of the money, essentially to pay you out over time.
So, that’s a con because I suppose it’s a risk. It’s a risk that an owner takes, but at the same time, it’s a risk they’re taking on the safest asset, in my opinion, that they could take a risk on, which is their own business that they’ve built, nut and bolt and they know all of the trading history. They know the market that they’re operating in.
So whilst, yes, there’s a risk and it’s a shame you don’t get all your cash out on day 1, the risk you’re taking is with an asset you know inside out. We’ve talked about vendor financing. You can reduce that risk slightly. If you want to take third-party finance, you can get more cash up front. Then there’s the risks that you mentioned, Gary, about the pressure that can put on repayments and pressure that puts on the company but that’s one of the first cons I would say um of an EOT Sale
Garry Karch
I think the other part of that is, if you elect to take advantage of the provision that you can charge a market rate of interest, you are going to get paid for that risk and for agreeing to be paid over time because there is risk obviously To the trading company remaining profitable and you know, being able to pay you off over, you know, 4 or 5, 6 years. I mean, so reality is, you should get paid for that risk and you do. Now, we touched a little bit on this. You don’t have to take the interest the way it’s deferred, it’s not accrued, it’s deferred, so it’s there and the documents provide for you to take that down the road if you want to. We’ve had a lot of clients that say, “I may take some of it, but I’m not necessarily going to take all of it”. The reason it’s important to have it in there, especially if you’re a company that’s hovering around the million, million and a half level of EBIDA is, it protects your ability to get third-party debt. So, you may elect to go into the deal and just say I’m going to just get paid out over time. I’ll do a vendor finance transaction but down the road, let’s just say you wanted to accelerate the payments by getting third-party debt, if you didn’t have an interest rate on the vendor loans, it would be really difficult for the trustee to say I am now going to go out and raise debt that’s going to cost 7 or 8%, where I’m not paying any interest whatsoever on these vendor loans. So, the trustee is in a little bit of a quandary as to how it justifies starting to pay interest on £4 million at 8% when it’s paying nothing right now. That’s the other, I think, sort of, you know, safe harbour with having a stated interest rate, whether the vendor elects to take it down the road or not, is it provides the commercial structure that the trustee can say “This is the same deal, it’s 7% interest, I’m paying 7%”. When you pay it is pretty much irrelevant. It’s just, it’s a commercial structure. Without that in the vendor loans, it’s difficult. I’m sure that there’d be some creative minds that could figure out a way to justify it but it’s not an easy justification, let’s just put it that way.
I think the other con, it goes back to what we talked about with the whole idea of synergies and value. When you talk about, the synergies that a trade buyer may see in a deal, and by synergies we mean cost reductions, increased profitability through, increased sales, clients, etcetera, is at that point there is an additional piece of the pie that can be divvied up between the buyer and the seller. If you say you look, we can cut costs by 10% at the target by bringing in you know accounting, HR, you know all of the types of support functions into to one company, one, yes you are going to you know have some redundancies, you know generally at the target because the buyer typically doesn’t let people go at it at its level. But then you get into the question of who gets how much of that. The buyer is going to say, “I’m the one who is able to create these, therefore I should get the benefit”. We should not value the company off of what additional cash flow I’m going to create. The seller, if they’re negotiating well, they have good advisors will say “No, part of that should come to me”. You’ve got, I think the ability, in that kind of a deal even though it’s. confrontational, you can negotiate additional value even above and beyond what might be a higher multiple, in a trade sale. Private equity, not as much because private equity and EOT multiples in our experience, unless you’re talking about a brand new platform for a private equity firm, which means a company to build around, they’re going to pay roughly the same type of multiple that the EOT would because those are just normal non-synergistic valuations. I think from that perspective, you don’t give up a lot. There’s no real, I think con to selling to private equity versus the EOT, except you get more value with the EOT, which comes back to fair value for your business. The commercial financing structure, as Akshay mentioned earlier, created almost another £1 million of value on a gross basis for the vendors in that deal. So, it’s one of those things, again, take the time to do an analysis up front. Don’t go into a deal and just hope it’s going to turn out for the best. There are plenty of people out there, us included obviously, that are more than happy to work with you to try to look at alternatives to make sure that what you do is going to be right for you and I think that’s important, This is, usually for, most of our clients. This is a once in a lifetime transaction. You don’t want to get it wrong. You want to get it right and I think that means considering all the factors we talked about on the pro side, I think it means looking at your need for cash going forward because, if you need a large chunk of cash at completion, EOT is probably not the right deal for you. If you’re looking to get 2/3 of the value paid to you in cash at completion, you’re probably better off going through the third-party sale route.
But if you don’t need that and some cash at completion would be great, he rest over time at a market interest rate is good, that does tend to work for most people. But, we have had clients that ended up going to third-party sale route because they did want the cash at completion and wanted to be able to walk away very quickly post completion, but that’s their decision and what we can do is support them in that with the analysis and then let the chips fall where they may. They’ve got to do what’s right for them because they probably don’t get a second chance. Most clients are not serial entrepreneurs.
Garry Karch
They’ve put their heart and soul into building the business they have but a lot of them are tired. It is not easy building and running a company and I think once they get to that point where they say it’s time to take some money off the table, derisk their lives a little bit. They probably aren’t jumping back in to start a new company the day after completion. I mean, that’s just the reality in that perspective. I think the other thing too is when you look at the sort of structural comparisons, we have had a number of clients who have gone through a failed sale process, that gives you even more comfort as to the pros and cons, they’ve seen what a pain it can be to go through a sale process that doesn’t even complete. You go through that and all of a sudden, the EOT starts to look even better and I think. that’s sort of my last point on the on the cons. So, with that, do you want to bring us home?
Akshay Vaghela
Yes, I mean, look, we’ve discussed quite a few things today and pros and cons was the topic here, and in reach in the end, I suppose just to sum it up, you know, we’ve discussed the pros which are getting a fair value for your business, a great valuation.
Tax advantages on being able to take cash you’ve already got. You’ve got the tax implications, which are, you know, I say implications, I’d rephrase that as advantages because you do get a 50% off your CGT bill. We’ve talked about the personal factor, the stress, it’s a lot, it’s a low stress sale compared to the other options and also the fact that look, you get to preserve the legacy and have a legacy and preserve the company you’ve built, reward the employees you’ve got and also retain a high level of day-to-day control. Once you’ve as part of the sales that’s and the control starts from the beginning, the decision to sell. The control through the sales process, how quickly you move, control over payments coming out to you in the future if you’re vendor financed and also control of the day-to-day operations of the business and those are all things that the EOT offers. That’s a summary of the pros. Anything you’d like to add to sign off, Gary?
Garry Karch
I think just, if you’d like to learn more, we’d encourage you to take a look at a couple of our webinars that are also posted online. One is, ‘An introduction to EOTs’ that compares the EOT to both trade sale and private equity. I think, you’d find that one very interesting. From an overall value perspective, it gives you an indication of what an EOT does look like in terms of the actual numbers compared to alternatives and then we have another one up there on how you finance these and you know the role of vendor financing in an EOT transaction. I think you’d find that to be to be valuable as well and finally if you are interested in discussing an EOT further, you can contact Akshay or me, either one of us. Our information is on the Doyle Clayton, the website under the EOT team and we’d be happy to schedule a follow-up call and if you are interested also in a feasibility analysis, we’d love to talk with you about that as well. With that, thank you for your time. We appreciate it and look forward to hopefully speaking with some of you soon.
Akshay Vaghela
Thank you.
