Market Value Requirement:
Shares sold to an EOT must be transferred at market value, determined by an independent valuation and reviewed by the Trustees. Unlike trade sales, sellers often stay involved longer, and because the valuation is a specific, agreed sum, EOT valuations are generally calculated using average comparative earnings multiples on an arm’s length basis. Trade sales, by contrast, may apply discounts to reflect the higher risk of locking in seller involvement.
 
Although EOT valuations are independent, they are usually advisor-led, with the Trustees being involved. This introduces some subjectivity, but in practice it is often in the Trust’s interest to complete the transaction. High earn-out structures can also act as a value multiplier, whether in an EOT or trade sale, influencing the overall deal economics. This dynamic can enhance EOT valuations, helping to offset the effect of recent tax increases.
 
The Thornier Question – Tax Upfront on Loan Notes
The biggest challenge is the requirement to pay tax upfront on deferred loan notes. We have just agreed our first debt deal at 4% interest to cover this over the duration of the loan notes. Another strategy is to use the first year’s loan notes to cover the tax bill. HMRC is highly unlikely to make tax conditional on the loan notes; their rules are typically too rigid for that, and EOT take-up would have to materially reduce before they review this. We doubt that will happen once people realise that 12% (Capital Gains Tax of 24% payable on 50% of the EOT valuation) is still the best rate in town.
 
We predicted the hike, and we believe this upfront tax will stay - but deals can be structured to finance the cost. The model now only works if you have strong cash flow, confidence in the loan notes, and ideally good reserves to help with the tax bill.
 
EOT Deferred Loan Notes
EOT structures are generally lower risk than trade  deal earn-outs unless the earn-outs are very carefully structured. This is particularly so if you are still involved in the business post-completion and can influence outcomes by sitting on the Trust and trade company boards. You cannot be the majority voice, but you can have material influence.
 
Historic Profits Still Attractive
Most sellers are still extracting historic profits at completion and even at 12%, the CGT is significantly less than dividend tax. The established valuation methodology adds historic profits to the goodwill in the debt free/cash free valuation principles.
 
EOTs vs Trade Deals
EOTs remain easier than trade deals, which at 24% CGT from April 26 (after any BADR relief which is usually nominal) are more challenging from a tax perspective.
 
Legacy
EOTs offer strong legacy benefits, thereby protecting employees and beneficiaries. With IHT due on private companies, not selling a business so that families can benefit is more challenging than ever. Selling not only creates capital for the sellers during their lifetime and afterwards for their beneficiaries.  With countless EOTs under our belt, all the companies we have helped transition have thrived, met their loan note obligations and quite a few have exceeded their ex-sellers’ expectations. As an EO business ourselves, we can also speak from experience about the growth stimulated through being EO owned.
 
There’s Always Dubai or Portugal…
For those considering relocation, the usual tax havens remain an option — but for most, EOTs still make more sense.
 
The Bigger Picture
These taxes are unlikely to diminish anytime soon. We need to take a balanced, long-term view. Things are not as bad as they look in the cold light of day. New opportunities are always born from change and challenges — and to be honest, we all knew that 0% on EOTs would not last forever.

* Note: There may be scope to use Section 280 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), which allows CGT to be paid in instalments when consideration is payable over time. However, because EOTs are subject to distributable reserves, they effectively operate like an earn-out, and Section 280 cannot be used for earn-outs. This remains an untested tax clearance area.

We would like to launch Peer2Peer Executive Group, so let us know if you are interested. It would also be great to catch up with you, so contact us today!