Welcome to our new blog series all about MBOs and succession, written by Steve Plaskitt, our Corporate Finance Partner. As it is such a large topic, Steve has broken down the topics into four episodes. We hope you find this series useful and informative!
Episode Two – EMI
In the previous blog we explored whether an MBO could be achievable as a way to plan for succession. This was from a business owner’s perspective.
There is another way to plan for succession that takes a little longer. However, it has the benefit that it incentivises and rewards management in the meantime. It is the use of an EMI scheme.
What is an EMI?
The EMI is an abbreviation for Employee Management Incentive Share Option Scheme, which can be approved by HMRC. It allows the company to grant options to key employees allowing them to buy shares in the future at a fixed price. This allows growth in the shares’ value to be taxed at a more beneficial rate. For example, taxed at 10% rather than a higher rate linked to income tax (e.g. 45%).
Benefits of an EMI
Benefits of the use of EMI compared to an MBO are as follows:
- It allows you to own the majority of the company shares knowing that a key employee is motivated to grow and drive the business;
- It keeps more choices available for your succession either to grow the business, to attract trade buyers or to allow an MBO in the future;
- If the management team receiving the share options are motivated and performance and results improve, it is more likely that the team can attract funders for an MBO as they have evidenced their skills already;
- It should produce more profits and allow you as business owner to take more of a step back from day to day stresses; and
- It helps retain and reward your key staff.
If it all works well, you should be in a position to offer management the chance of an MBO. They should be ready to plan how they can get the deal funded and completed.
The next blog will explore the importance of advisers in assisting to control the MBO process and achieve a successful buy out.