What happens to EMI options on a company sale? Tax, due diligence, exercise, rollover, common risks and how to make your EMI scheme exit-ready.

What Happens to EMI Options When You Sell Your Company?

Byron Yeung February 18, 2026

Enterprise Management Incentive (“EMI”) options are one of the most widely used employee incentive tools in UK companies. When they are implemented and operated properly, they can be extremely effective, both from a commercial and tax perspective. They help you recruit and retain key people, and they allow employees to share in the upside if the business grows and is eventually sold.

If you are planning to sell your company and you have granted EMI share options to your employees, it is sensible to think about how those options will work in the sale process. In many cases, EMI options are designed with an eventual exit in mind. However, the outcome depends on how the option agreements are drafted and whether the option scheme has been administered correctly.

A buyer and their advisers will likely look closely at your company’s EMI scheme when carrying out their due diligence. They will want to understand what options have been granted, whether the scheme remains compliant with the EMI rules, and what happens to the options on completion of the transaction.

This article explains how EMI options are typically dealt with on a sale, the issues buyers focus on during due diligence, and how founders can plan ahead to avoid delays to the sale of their companies or unwanted tax consequences.

What usually happens to EMI options on a company sale?

Typically, a buyer will want all options tidied up at completion so that ownership of the company transfers cleanly. In most cases, EMI options are handled in one of three ways:

Exercise and sale – Employees can exercise their options shortly before completion of the sale of the company and their options can be converted into shares. Those shares are then sold to the buyer alongside the shares held by the other shareholders of the company. This approach allows option holders to participate directly in the exit proceeds and, if the EMI conditions have been met, benefit from the EMI tax benefits (e.g. any growth in value is usually taxed as a capital gain instead of employment income).
Cash out – EMI options can be cancelled in exchange for a cash payment linked to the sale price. This can simplify the completion process because option holders do not need to formally become shareholders, but it may change the tax analysis and must be permitted under the plan rules.
Rollover or replacement options – EMI options can be rolled over into the post-completion structure. For example, the options can be replaced with equivalent options in the buying company.

The route that applies will depend on the terms of your EMI scheme, whether the options have vested, and how the transaction is structured.

Why do EMI options come under the spotlight in a company sale?

A company sale is often the moment when EMI options usually become economically real. Until then, options are simply rights to acquire shares in the future. On an exit, they can convert into a material payout, and can carry significant tax consequences.

For a buyer, EMI options create three categories of risk.

Legal enforceability – A buyer needs to know whether the options are validly granted, whether they can be exercised, and whether the resulting shares can be sold cleanly as part of the transaction. If the documentation is incomplete, inconsistent, or missing approvals, the buyer may be concerned that option holders could challenge outcomes or claim contractual rights that the company did not anticipate.
Cap table certainty – Options affect your fully diluted shareholding in the company, which matters for valuation discussions, proceeds distribution and completion mechanics. If the option register is not up to date, or if leavers have not been dealt with correctly, it may be unclear who is entitled to participate in the sale proceeds.
Tax compliance risk – EMI is a tax-advantaged regime, but only if the statutory conditions and reporting requirements are met. If the EMI criteria have not been satisfied, employees may face Income Tax and National Insurance contributions instead of the expected capital gains treatment, and the buyer may worry about potential claims from the option holders.

EMI compliance issues are frequently identified during due diligence and can become a significant complication in a company sale, particularly for companies where the scheme was implemented early and not revisited.

What buyers expect to see in EMI due diligence

Most buyers will ask for a comprehensive EMI document pack. This is usually non-negotiable because EMI issues can materially affect the buyer’s tax risk and relationships with employee after completion.

Buyers typically request:

The plan rules (and any amendments) – A buyer will want to see exactly what the scheme allows, including discretionary powers, leaver provisions and how options are treated on an exit. They will also want to know whether the rules have been varied over time and whether those variations were validly approved.
Board and shareholder approvals – A buyer will expect to see clear evidence that the scheme and each grant were properly authorised. Where the company’s constitutional documents require shareholder approval for share issues or option grants, the buyer will want to see that those consents were obtained.
Signed option agreements and grant documentation – A common issue is that option terms were agreed but never properly executed, or documents are missing for historic grants. A buyer will want to see a complete set of signed agreements.
Valuation evidence and exercise price rationale – Where options were granted at market value, the buyer will want to see how market value was determined and when. If there was an HMRC agreed valuation, the buyer may want to see the company’s correspondence with HMRC.
Evidence of HMRC reporting and filings – A buyer will want confirmation that reporting has been handled properly, because late or missing reporting can call EMI status into question. Please see our article here for more details on reporting obligations and other common mistakes in setting up EMI schemes.

In practice, most buyers will not proceed to completion without comfort that the EMI position is clear and any risks are understood. If it is not, you may face a painful late-stage scramble to locate documents, reconstruct approvals, or negotiate risk allocation.

What are the most common EMI issues that can delay a company sale?

Certain problem areas regularly emerge during EMI due diligence. Most of these issues are avoidable, provided they are identified early and addressed before the sale process becomes time-critical.

EMI options granted when a sale is already being arranged –
EMI requires that options are granted at a time when there are no “arrangements” in place that could lead to a change of control of the company. “Arrangements” can include heads of terms, advanced negotiations, or a process that has moved beyond early discussions. If EMI options are granted after such arrangements exist, there is a risk that the options will not be EMI-qualifying. That can produce very unwelcome consequences for employees and can lead to difficult conversations in a sale process, especially if employees were expecting a particular tax outcome.
Historic grants that were not properly reported or documented – Options are sometimes promised as part of recruitment, but the formal paperwork, approvals and reporting can be forgotten. These issues often only emerge when a buyer asks for evidence and the company cannot produce it. This can result in delays, remedial work, and sometimes a need to negotiate warranties and indemnities with the buyer.
Informal variations to the EMI scheme – It is common for companies to change vesting schedules, accelerate vesting for key hires, extend exercise windows, or waive leaver provisions. Although these changes might make sense commercially, such variations can have tax implications as a result of the strict EMI rules. Some variations can be treated as the grant of a new option, which may reset conditions and potentially affect tax-advantaged status. From a buyer’s point of view, informal variations can also raise the concern that the scheme has not been administered consistently, which can increase the perceived risk of employee disputes or unexpected claims.
Leaver clean-up issues – Many EMI option registers contain “ghost” options. They might relate to former employees who left the company years ago, or options that were agreed but never properly cancelled. If leaver provisions were not applied consistently, or if cancellations were not documented, buyers will often treat this as a risk, because it creates uncertainty as to who may have rights remaining at completion.

An effective way to reduce these risks is to review your company’s EMI scheme to ensure that it is exit-ready to prevent any gaps in documents, reporting or leaver treatment.

Making your EMI scheme exit-ready

You want to be able to show a buyer, quickly and confidently, that the company’s EMI scheme was properly authorised, documented and reported, and that there is a clear plan for how existing options will be dealt with at completion.

A practical approach includes:

Document review – You should check the plan rules, grant documentation and approvals, and ensure that the scheme mechanics align with the company’s articles and shareholders’ agreement.
Cap table reconciliation – You should check whether the company’s share capital and option records align. Ensuring these are consistent early helps avoid last-minute confusion and avoids the risk of accidentally misstating ownership or dilution.
Reporting review – You should confirm that the EMI scheme is properly registered and that annual returns have been submitted on time. Where there are gaps, it is better to identify them early, because there may be corrective steps available, or any relevant matters can be disclosed to the buyer.
Planning exit mechanics – You should determine whether options will be exercised, cancelled or rolled over, and ensure that the plan rules and documents support that approach.

These steps can be done well before you approach a buyer. They can make the sale process easier, not just because the buyer is reassured, but because your management team is not forced to spend the final few weeks before completion digging through old records.

Questions to ask before you approach a buyer

Before entering into sale negotiations, you should be able to answer the following questions, with evidence:

Do we have a complete set of signed plan and grant documents for every option holder?
Can we show the board approvals for the scheme and each grant?
Can we evidence how market value was determined for each grant?
Are leaver outcomes documented and consistent with the plan rules?
Can we access the ERS portal and produce evidence of filings?
Have we identified any grants made during periods when a sale process may already have been in motion?
Are our constitutional documents aligned with the scheme, particularly on share issues, transfers and drag-along provisions?
Do we have a clear plan for how options will be exercised and sold at completion?

If any of these questions produce uncertainty, it is generally better to address the issue before a buyer’s advisers raise it.

How we can help

If you are planning a company sale, EMI options should be treated as part of your exit strategy, not as an administrative afterthought. Most exit delays caused by EMI issues stem from lack of preparation. With a structured review and good documentation, many of the common risks can be reduced significantly.

At The Jonathan Lea Network, we regularly support founders and management teams through company sales, including reviewing and tidying EMI option schemes, preparing due diligence packs, and advising on exit mechanics so that options are dealt with cleanly on completion.

If you are considering a sale or you want to make sure your EMI scheme will stand up to scrutiny, we can help you:

identify and fix common due diligence issues early;
align scheme terms with the company’s articles and shareholders’ agreement;
plan option exercise and sale mechanics for completion; and
reduce the risk of delays and protect value for founders and employees.

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. Following an initial discussion, we can provide a clear scope of work, a fee estimate (or fixed fee where appropriate), and confirm any information or documentation we would need to review.

FAQ: What Happens to EMI Options When You Sell Your Company?

What happens if an employee refuses to exercise their EMI options before completion?: In most share sales, the transaction documents will include “drag-along” provisions or specific mechanics requiring option holders to exercise and sell as part of the deal. If the documents do not clearly compel participation, a reluctant option holder can cause delay and friction in the transaction. This is why reviewing your EMI scheme and constitutional documents before commencing the sale process is strongly advisable.
What happens if the company’s valuation has increased significantly since the EMI options were granted?: If the exercise price was set at market value at the date of grant, any increase in value between grant and sale is typically subject to capital gains tax on disposal, rather than income tax on exercise. However, if the exercise price was set at a discount to market value, part of the gain may be subject to income tax. Buyers will often examine historic valuation evidence to understand this position.
Do EMI options affect the sale price of the company?: EMI options do not usually reduce the headline enterprise value agreed with a buyer. However, they do affect how sale proceeds are divided between the shareholders. It is important that the company understands how the granted options will affect the net proceeds of each shareholder and option holders on a fully diluted basis to avoid any miscommunication around the proportion of the purchase price each individual receives.
What happens to unvested EMI options on a company sale?: The outcome depends on the plan rules. Some schemes provide for automatic acceleration of unvested options on a sale. Others give the board discretion to accelerate, and some provide that unvested options lapse. Reviewing the vesting provisions early allows you to manage employee expectations and avoid disputes during the transaction.
What happens if EMI options were granted incorrectly?: If options did not qualify as EMI due to failures in eligibility, reporting or timing, they may instead be treated as unapproved share options. This can result in income tax and National Insurance charges on exercise. The issue may not become visible until due diligence, which is why early review is often recommended.
Does the buyer inherit any liability for historic EMI errors?: Buyers will usually seek contractual protection against pre-completion liabilities through warranties and indemnities in the share purchase agreement. While liabilities technically sit with the company, commercial negotiations often allocate risk between buyer and seller. Historic EMI compliance issues can therefore have a direct impact on deal terms.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.