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Succession Planning | Finance | MBO

MBO vs EOT: Choosing the Right Internal Succession Path

The Real Cost of Delaying Succession

For many IFA businesses, succession planning is one of those long-deferred tasks, known to be important but difficult to prioritise. But the reality is clear: a well-structured plan doesn’t just protect the value of the firm, it creates continuity for clients, clarity for teams, and confidence for the next generation of leadership.

As we’ve covered in previous articles, owners considering their exit have a range of choices, from trade sales to private equity deals. However, internal succession often becomes the preferred choice for firms aiming to preserve their independence and company culture.

When it comes to internal succession, the two most prominent structures are the Management Buy-Out (MBO) and the Employee Ownership Trust (EOT), the latter having grown significantly in popularity among sellers over the past five years. While both offer continuity to the firm and clients, they differ considerably in structure, governance, and long-term implications, not just for founders, but also for the management teams taking over.

Understanding the Options

What is an Employee Ownership Trust (EOT)?

EOTs enable the sale of a controlling stake in a business (typically 51% or more) to a trust representing all employees. They’re designed to preserve long-term independence, reward team contribution, and offer tax advantages, notably 0% capital gains tax for qualifying disposals by the selling owner.

What is a Management Buy-Out (MBO)?

An MBO allows the existing leadership team to acquire ownership, typically through vendor financing and external capital. It provides a more direct link between performance and ownership and is often structured in phases over time to balance affordability with business growth. 

Key Considerations When Choosing a Path

1. Valuation and Tax Structure

EOTs offer a compelling full capital gains tax exemption for qualifying disposals, a significant incentive for sellers. But the generosity of this relief brings increased responsibility. To qualify, the sale must be completed at fair market value, supported by evidence of a robust, independent valuation. This creates a delicate balancing act: sellers are understandably motivated to secure a strong exit value, yet the business (now owned by the trust) must repay this value from future profits. If the price is set too high, it risks overburdening the EOT, undermining its long-term viability.

This challenge around fair pricing has not gone unnoticed; HMRC has stepped up its scrutiny in response. In autumn 2024, updated guidance and a formal consultation were launched to clamp down on potential abuse, particularly in relation to inflated valuations, extended repayment terms, and indirect financial benefit to the seller. While EOTs remain fundamentally distinct from their predecessor, the now-discredited Employee Benefit Trusts (EBTs), there is growing concern that, without clear boundaries, EOTs could attract similar reputational and regulatory pressure. Sellers and advisers alike should anticipate further reform and ensure that structures are commercially sound from the outset.

In an MBO, while the sale is subject to Capital Gains Tax, business owners may be eligible for Business Asset Disposal Relief (BADR) – reducing the CGT rate on qualifying gains to 14%, up to a lifetime limit of £1 million. From 6 April 2026, this rate is set to rise to 18%, reducing the tax efficiency of disposals under this relief. Valuations in MBOs are typically market-tested and independently validated, providing transparency and a commercial logic that both seller and buyer can stand behind.

2. Funding and Financial Viability

In most EOTs, the trust funds the purchase through company profits, typically repaying the seller over several years. This avoids the need for external capital but can constrain future investment and day-to-day cash flow. In Spring 2024, HMRC extended the capital gains tax relief clawback period from one year to four years, specifically to deter businesses from being ‘flipped’ shortly after the EOT sale and to prevent abuse of the tax exemption. This change introduces a new layer of risk for sellers: if the business is sold or fails within four years of the EOT transaction, the CGT relief is lost, and tax becomes payable on gains that may not have been fully realised. For those relying on deferred consideration, this creates exposure not only to potential tax liabilities, but also to the possibility of receiving less than the agreed value if the trust struggles to meet its obligations.

In MBOs, the buying team rarely has the full capital available themselves, which is where the choice of capital partner becomes critical. The funding must be carefully structured to support the transition without destabilising the firm’s financial position. Striking the right balance between loan size, term length, and interest rate is essential — as discussed in our previous article, Understanding the Real Cost of Acquisition Funding, it’s not just about access to capital, but about ensuring repayments are sustainable relative to free cashflow.

As discussed below, MBOs are most effective when staged, allowing the business to transition ownership over time without forcing the team to go “all in” from day one.

3. Governance and Long-Term Intent

An EOT is designed to be the end state for ownership. It’s not a stepping stone. Future sales are challenging to execute and come with high personal tax costs for employees, who may face both income tax and national insurance on proceeds from a sale. This limits strategic flexibility and makes long-term viability crucial.

Trustees must weigh any major decision, including a sale, investment, or restructure, against the best interests of all employees. In practice, this can slow decision-making and dilute accountability.

By contrast, MBOs typically preserve a more traditional structure of ownership aligned with leadership and long-serving staff, allowing decisions to be made quickly and with commercial intent. They also offer greater flexibility in how equity is split among the buyout team, enabling tailored arrangements based on roles, contribution, and risk appetite. This is something not easily achieved under collective ownership models like EOTs.

Structuring Succession Deals Realistically

One of the most important, and often underestimated, aspects of internal succession is how the deal is structured. Whether it’s an MBO or EOT, getting the structure right is what determines whether the outcome is sustainable or a financial strain from day one.

Most IFA firms are valued at a multiple of EBITDA, commonly in the range of six to eight, depending on recurring revenue, client profile, and margin. Even a modestly profitable firm can command a multi-million-pound valuation.

If a buying team is expected to fund a majority or full-value purchase, whether paid upfront, through deferred consideration, or funded from future profits, the business often cannot generate enough surplus cash to service the payments and maintain healthy operations. Without careful structuring, this can lead to underperformance, strained relationships, or a failure to deliver the value promised to the seller.

A staged approach tends to be the most practical and sustainable. MBOs often begin with a minority equity sale, backed by external funding, with ownership transitioning over time. This allows the business to manage risk and affordability while gradually empowering the next generation of leadership. Although EOTs follow a different legal and governance model, they too can be phased. In some cases, they may even be blended with MBO-style mechanisms to create a more balanced path to full ownership, reducing pressure on cashflow and improving stability for all involved.

Succession planning should not be a financial stretch. It should be a strategic process that works for sellers, for buyers, and for the business itself. That starts with a structure that reflects commercial reality, not just aspiration.

A Balanced Path Forward

Whether you pursue an MBO or EOT, the key to success lies in structuring a deal that reflects the financial capacity of the business and the long-term ambitions of the people taking it forward. MBOs offer flexibility, clarity, and direct alignment with leadership. EOTs preserve independence and offer tax efficiency, but they require long-term belief in shared ownership and governance.

At Vertus Capital, we work with both owners and management teams to fund and structure internal succession plans that preserve the firm’s legacy, empower its people, and ensure long-term success.

Thinking about succession? Get in touch with us here.