Employee Ownership Trusts (EOT) are becoming an increasingly popular ownership model which can deliver significant benefits to both shareholders and employees.
Employee Ownership businesses are structured with the sale of the business to a Trust. The Trust then operates the business on behalf of the employees.
Since 2014, such sales have been 100% Capital Gains Tax (CGT) free. This is due to the belief that they increase both company productivity and sustainability. As well as closing the gap between shareholders and employees.
According to Avondale, there are now approximately 600 employee-owned businesses in the UK and the number is rapidly growing. We have set out below some of the key benefits and risks of EOT’s. As well as dispelling some myths around their complexity and commercial benefits.
Key requirements to qualify to become an Employee Ownership Trust are:
- The sale must be a minimum of 51% of the company shares, however many are 100%
- The business must employ more than 7 staff members to take advantage of the EOT structure
- A new company should be created. This will act as the employee share ownership trust with the existing shareholders selling their trading business shares to this EOT company
- A sale and purchase agreement will be executed. After the sale the company will trade as a fully owned subsidiary of EOT
- The EOT valuation is subject to HMRC clearance and will be assessed using comparisons with other private sale benchmarks. The Government is actively promoting the Employee Ownership business model
Below are just some of the key benefits, which attract many shareholders to consider EOTs as an exit strategy:
- Unlike an open-market sale, the due diligence can be significantly reduced. The deal can also be structured over an agreed period
- The transition from a traditional company structure to an EOT can be vendor-led. This means that employee buy-in is only required at completion. As opposed to an MBO, which is generally led by the motivated management team
- Owners can decide to gradually exit the business whilst they pass on greater responsibility to management. This allows the vendor to benefit from maximum commercial value, zero tax and ensuring a smooth handover
- With loan notes often structured over quite long periods, Employee Ownership can lead to enhanced value in many instances. EOT sales can achieve better shareholder value than trade deals when structured correctly
- Profits are more often reinvested for growth for the benefit of the business and the employees. Most Employee Ownership businesses pay salaries in the upper quartile for their sector to senior management, along with the potential tax-free incentive bonus of £3,600 per annum to all employees
- EOT businesses see increased retention of staff and greater productivity
- Employee Ownership sales provide an optimal solution for vendors. Enabling them to exit on a commercial basis whilst ensuring the continued growth of the business, economic contribution and adding to the well-being of the employees
As with all new, revolutionary schemes, there may be some risks and complexities involved in determining whether an EOT is the best option for your business.
When considering whether an Employee Ownership Trust is the right option for your business, you should be aware of some possible difficulties:
- A motivated trade buyer may offer a greater exit value for the shareholders. As noted above, the EOT valuation, is subject to HMRC clearance and will be assessed using comparisons with other private sale benchmarks. Owners therefore may forego an opportunity to earn high multiples if a competitive market exists
- Management may not have the requisite skills or appetite to take over and run the business. The development of a future management team will be critical to long-term success
- Whilst setting up an EOT may be straight forward, any future sale or dissolution of the trust may cause further complexities. The nature of these new trusts can lead to uncertainty as how to exit fully in the future, once set up
- Shareholders may not be able to fully exit from the business as with a conventional sale. A full succession plan will be required to establish a new board and trustees. It may take time to build employee engagement to the new structure
How Can We Help?
EOTs can often seem highly technical and complex. This can make shareholders reluctant to consider what may be an advantageous option, both for them and employees. However, At DTE Corporate Finance, our extensive experience allows us to recommend the most appropriate and beneficial exit strategy tailored specifically to your circumstances. Contact a member of our team to discuss your business requirements on 0161 819 1910.
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