Business Succession Planning: Sale, MBO, EOT or Family Transfer

Armstrong Watson's 2025 survey of business owners found that 16% had not considered their exit plan. It also found that 21% of owners plan to pass the business to their children, yet 61% of businesses where the next generation is already working in the business have not discussed succession. The pattern is familiar to advisers: the owner assumes the family understands, the family assumes the owner will say when, and the conversation does not happen until health, a bid or a bereavement forces it.

The scale matters. GOV.UK estimated 5.7 million private sector businesses in the UK at the start of 2025, of which 4.3 million (75%) did not employ anyone aside from the owners. SMEs accounted for 60% of private sector employment. The same pressure appears elsewhere: a chart from the US Census Bureau's 2019 Annual Business Survey, covering 2018, carried the headline that over half of US business owners were aged 55 and over. Owner-managed firms dominate these populations, and a large cohort of founders is approaching the point at which it will need a buyer, a successor or a plan.

For an owner-manager, delay is not neutral. It narrows the options. A sale benefits from several years of clean, reliable numbers. An employee ownership trust needs time to structure the financing and for employees to understand what ownership means. A family transfer needs a successor who is ready and a tax position that has been modelled. Each takes longer than owners expect. An owner who starts late, with a fixed retirement date or a health event, will find the only exit available is the one a buyer chooses to offer.

Set a decision date. Not an exit date, but the day by which you will have chosen the primary route and the fallback. For most owners that should be at least three years before they want to step back. Write down the date, the minimum price or income you need, and what you are unwilling to accept, whether that is a competitor owning the brand or staff losing their jobs. Share it with one trusted adviser and one family member. Those two conversations are the start of a plan.

One reason owners delay is that succession feels like an ending. It is better framed as the next phase of ownership: the point at which value built over decades is converted, protected or passed on. Owners who adopt that framing tend to start earlier, because they see planning as a way of keeping control, not surrendering it. A practical test is whether the owner can describe, in two sentences, what a good outcome looks like for themselves, the staff and the family. If not, planning has not yet begun.

A trade sale usually maximises price and certainty of cash at completion, but it hands control, and often culture, to a stranger. A management buyout keeps the business with people who know it, usually with private equity or lender backing, and the price reflects what the management and its funders can afford. An employee ownership trust sells to employees through a trust, preserving independence and legacy, with the price paid from future profits. A family transfer keeps ownership in the family, often at the cost of liquidity for the owner. Each route trades one benefit for another.

The buyout market is a useful indicator of appetite. CMBOR, the buyout research centre at Nottingham University Business School, recorded 95 UK buyouts valued at €16.1bn in the first half of 2024 and described the UK as Europe's largest and most active market. That depth matters to an owner considering an MBO, because it means experienced funders, lawyers and operating partners are available. It also means the management team will be negotiating against professionals, which is why independent advice and a credible alternative route both matter.

The right exit depends on what the owner values most, and most owners value more than price. Some want a clean break and the highest multiple. Others want employees protected, the name preserved, or a role for a daughter or a long-serving finance director. When objectives conflict, the owner must rank them. We find three questions useful: what is the minimum I need personally, what outcomes would I regret, and how involved do I want to be afterwards? The answers usually eliminate one or two routes before any valuation work begins.

Use the comparison table in this report as a starting point, but make it your own. Score each route against price, certainty, speed, legacy, tax and your continuing role. Ask your adviser to test the top two routes with indicative numbers. A route that looks attractive on legacy but cannot be funded without lowering the price below your minimum is not a route; it is an aspiration. Narrow to two before you tell anyone else, and keep the second alive until the first has completed.

It helps to separate two questions that are often blurred: who will own the business, and who will run it. Ownership can pass to a buyer, a trust or a family while management stays with a trusted team, or the reverse. Splitting the questions widens the options. A family may retain ownership while hiring an external chief executive; an employee trust may own the company while the founder remains as chair for a defined period. Many apparently binary choices become workable once the two are decoupled.

Employee ownership trusts, introduced in the UK in 2014, have moved from curiosity to mainstream route. HR Magazine reported that 312 EOTs were created in the 12 months ending 31 March 2022, nearly double the 181 formed in 2020-21 and substantially more than the 50 created in 2018-19. BDO estimates that approximately 2,500 companies have now been acquired by EOT trustees, and recorded 560 new employee-owned businesses in 2024. For an owner who wants independence and legacy, the EOT is now a well-understood alternative to a trade sale.

The tax case has narrowed. BDO notes that capital gains tax relief on a sale to an EOT was reduced from 100% to 50% with effect from 26 November 2025, giving an effective rate of 12% on the gain, and still describes a 12% rate as one of the most tax-efficient transactions available to UK shareholders. The rate remains attractive, but it is no longer nil, and the owner's net proceeds will be lower than under the earlier rules. Any model prepared before the change should be re-run.

The commercial question matters more than the tax question. An EOT is paid for from the company's future profits, which means the owner is, in effect, a lender to the business for several years and depends on the leadership team to deliver. That suits a profitable, cash-generative company with a strong second tier of managers. It suits poorly a business that depends on the founder for key relationships. It also cannot be rushed: trustees must act independently, and employees must understand what ownership means.

If an EOT is on your list, test it early with three analyses. Can free cash flow fund the deferred consideration at a realistic pace? Can the management team operate without you? Are the trustees you would appoint credible and independent? Compare net proceeds with those from a trade sale after tax, and price in the risk of being paid over time. Some owners will find the discount to a trade-sale price is worth the legacy; others will not. Either answer is rational if it is reached with numbers.

Timing risk is real. The ONS estimated 152 domestic M&A transactions involving UK companies in the fourth quarter of 2025, 79 fewer than the 231 in the fourth quarter of 2024, and the value of domestic M&A, at £1.8 billion, was the lowest since the second quarter of 2020. Over the same period, completed inward deals by foreign acquirers rose from 189 to 217, while outward deals were broadly flat at 75 against 77. UK buyers were scarcer; foreign buyers were more active.

Exit values for sponsor-backed companies swing as well. CMBOR recorded European buyout realisations of €61.4bn in the first half of 2023, €39.1bn in the second half and €45.4bn in the first half of 2024. These figures describe larger, sponsor-backed transactions, not owner-managed firms, but they signal the market in which a prepared owner may find a financial buyer. When realisations fall, funds typically hold assets longer and have less appetite for new platforms; when they recover, sellers with clean numbers are seen first.

The lesson is not to time the market, which nobody can do, but to be ready to act when conditions suit. A business with three years of reliable management accounts, diversified customers, documented processes and a leadership team that does not need the owner every day can transact in a weak market and will command attention in a strong one. A business that depends on the owner's relationships and has patchy records can only transact when buyers are desperate, which is rarely.

Build a vendor-readiness file now: reviewed accounts, a clean capitalisation table, key contracts, a customer concentration analysis, a list of the owner's personal dependencies and a plan to remove them. Run the file past a corporate finance adviser as if a buyer had asked for it. The gaps are the work of the next eighteen months. Do this whichever route you favour, because the same file supports a trade sale, an MBO, an EOT and, in a different form, a family transfer.

Buyers also read the owner's preparation as a signal of risk. A seller who can produce a clear data room within days, answer questions consistently and show that the management team is engaged tends to inspire confidence, which supports price and reduces the chance of late renegotiation. A seller who cannot gives the buyer reasons to discount and to extend due diligence. Preparation is therefore not an administrative nicety. It is a negotiating asset, and it is entirely within the owner's control.

Family firms are central to the UK's small-business population. City A.M., citing the Institute for Family Business, reported that of the 4.6m family-owned firms in the UK, 99.6 per cent are small. Yet the Armstrong Watson survey found that 61% of businesses with the next generation already involved have not discussed succession. The tax position often gets attention first because it can be quantified. The harder questions concern who leads, who owns, how siblings outside the business are treated, and what happens to the owner's income.

The tax rules are in motion. From 6 April 2026, the threshold for 100% relief rises from £1 million to £2.5 million per individual, with 50% relief continuing above it, and couples can pass on up to £5 million of qualifying agricultural or business assets free of inheritance tax, according to Penningtons Manches Cooper's summary of the government's revision. Relief above the threshold is not lost, but the cost of a transfer on death may differ materially from earlier planning assumptions, particularly for larger, asset-rich family firms.

A family transfer needs a team of advisers, not one: a tax specialist, a lawyer and someone who can facilitate the family conversation. Most disputes arise not from the tax bill but from unspoken assumptions about fairness. A successor who works in the business expects the shares; a sibling who does not expects equal treatment. Both views are reasonable, and both are better aired early, ideally in a written family charter that sets out how ownership, employment and dividends will work.

Start with conversations, then paper. Meet family members separately, then together. Document roles, expectations and a process for resolving disagreement. Test the successor by giving them a quarterly commitment to own and watching how they deliver it. Model the tax outcomes under the new thresholds. Only then choose the structure, whether that is gifted shares, a trust, a staged buy-out funded by the business or a combination. Keep the option of an external sale alive until the family route has proved that it works.

Fairness within a family rarely means equal shares. A child who has worked in the business for twenty years may reasonably expect more than a sibling who has not, and parents often wish to balance this with other assets. The workable principle is transparency: explain the reasoning, record it, and revisit it if circumstances change. Surprises, such as a will that reveals the plan, are the most reliable cause of later disputes, and the cheapest remedy is a conversation held while everyone can still contribute.

The Gulf offers a clear illustration of the cost of delay. The CEO of Saudi Arabia's National Center for Family Business said in 2024 that 59% of family businesses do not adopt succession planning, and 75% lack family charters. Lombard Odier's 2025 survey of high net worth individuals in the Gulf found that fewer than one-fifth (18%) of family businesses have a comprehensive succession plan, and that 49% of high net worth families continue to postpone the process.

These findings come from a region where many family firms are approaching a generational handover. The risks mirror those in the UK: disagreement among heirs, loss of key relationships and forced sales. What differs is how visible the gap is. With three-quarters of Saudi family businesses lacking a family charter, the governance infrastructure that supports orderly succession is thin at exactly the moment demand for it is rising.

For a UK owner with Gulf partners, customers or family members, the lesson is practical. A succession event at a partner or customer can interrupt supply, credit or decision-making in your own business, and counterparties with no plan are a concentration risk worth mapping. For UK families with interests in the Gulf, cross-border structures add legal and tax layers, which makes early planning more valuable still.

Ask your five largest customers and partners, directly and politely, who would take decisions if the founder stepped back tomorrow. Note the answer, or the silence. Where you hold a long-term contract with a family-owned counterparty in Saudi Arabia, the UAE or elsewhere, consider a change-of-control or key-person clause. Then apply the same question to your own business: who decides if you cannot? If the answer is unclear, that is the first thing to fix.

Owners who exit on their terms tend to follow a similar sequence. In year five, the owner sets the objective and the decision date and begins building a second tier of managers. In year four, the financial track record is tidied and personal dependencies are removed. In year three, the preferred route and fallback are chosen. In year two, structure, funding and advisers are put in place. In the final year, the transaction or transfer is executed and the handover managed. Each stage has outputs, and none requires an announcement to staff or competitors.

The sequence is not rigid. A firm with an unexpected approach may need to compress it; a family with a young successor may extend it. What matters is that each year has a purpose. The common failure is to treat the first four years as business as usual and attempt the whole programme in the fifth, when negotiating leverage has already shifted to the buyer, the trustees or the family member who has waited longest.

For the owner, this means treating the exit as a project with a sponsor, a budget and milestones, and keeping a consistent relationship with advisers. Choose a corporate finance adviser, a tax adviser and a lawyer early, and brief them on the decision date. Where the transaction involves regulated activity, such as raising capital or arranging investments, it should be handled with FCA-authorised firms. Karter McKinley supports the process around them; it does not provide regulated advice.

Start this month with three actions: write the objective in one paragraph; list the three things only you can do in the business; and book a conversation with your adviser to agree the decision date. Then put a quarterly slot in the diary to review progress against the runway. If you do not schedule it, the exit will happen by default, and the default exit is the one nobody chose.

Treat the runway as a living document. Review it each quarter alongside the business plan, update it when the market, the family or the owner's health changes, and record the reasons for any change. Owners who do this find that decisions which once felt enormous become a series of small, reversible steps. By the time the transaction begins, the key choices have been made, the advisers know the business and the owner has already rehearsed the answers to the questions buyers, trustees and family members will ask.

Karter McKinley's M&A & Corporate Development work helps owner-managers frame the exit decision, prepare a vendor-readiness file and run a structured process for a sale, buyout or employee-ownership route. Where regulated activity is involved, we work alongside FCA-authorised firms. This report is information, not financial or legal advice.