Selling to an Employee Ownership Trust (EOT) has become an increasingly popular exit route for shareholders of owner managed businesses. One well known advantage of a qualifying sale of shares in a company to an EOT is an exemption from Capital Gains Tax.
However, the tax break is not the only thing for an owner manager to think about when considering whether a sale to an EOT is right for them and their business.
BHW Solicitors have not only advised clients on EOT sales but have gone through this process ourselves in 2022; preserving BHW as Leicester’s leading independent commercial law firm.
- Exit solution
A business owner’s exit from their company can be hindered by many factors ranging from a lack of suitable third-party buyers (including not wanting to sell to a competitor) to there being no suitable management team for a buy-out.
A sale to an EOT can provide a ready-made market for the shares in the company whilst solving succession issues at the same time.
- Continuity of the business
Many owners have spent several years building up their company. When it is time for them to sell, whether due to retirement or them wanting to realise some value, they often have little to no idea how the buyer will run their company in the future.
When an owner sells to an EOT, as there is no external third party taking over, this avoids parts of the business being hived off or the company split up to suit the Buyer’s business plans. An EOT can preserve the culture of a business; allowing it to continue to be run with the same ethos and ideals on which it was founded.
Often with EOTs, owners continue to be involved in the day to day running of the business to help ensure it performs as well as possible while they are being paid (see below). In the short term, the business’ management could remain the same; ensuring that customers see no change in their service level.
- The sale effectively can be funded by the business
The purchase price partially could be paid upfront by gifting the company’s excess cash to the EOT on or shortly after completion. The remainder could be paid over a number of years, funded by the EOT through the profits of the company.
Given that structure, EOTs often have longer payment terms than a traditional sale but the overall return can be higher (not least with the CGT exemption). An EOT is likely to differ, however, from a third-party sale in which an owner could perhaps walk away/retire after a short handover period having been paid upfront.
- Friendly sale process
The sale process should be friendlier compared to a sale to a third party, as it is unlikely that documents are to be negotiated. The sale contract could be shorter with fewer warranties, and potentially leave the owner with less residual liabilities, when compared to a sale to a third party.
Once the important preparatory work has been undertaken (agreeing the EOT structure, obtaining independent financial valuations and tax clearances etc.) then the transaction itself should be smoother.
- The owner does not need to sell all of their shares.
Provided the EOT meets the relevant conditions, an EOT does not have to own all of the shares in the company as long as it holds a controlling stake. This means that an owner could realise some of the value from their shareholding in a tax advantageous manner, while retaining some ownership of the company.
- Employee benefits
Once any deferred consideration has been paid to sellers then the EOT and its employees are able to benefit in the profits of the company. The employees are then in effect working for themselves.
EOTs are able to provide their employees with a bonus of up to £3,600 free from income tax each financial year (although national insurance contributions still apply). A bonus must be paid to all eligible employees on the same terms but bonus levels can be set by reference to remuneration, length of service or hours worked.
- Employee incentivisation and engagement
Employee ownership has been shown to motivate employees, increase productivity, help with employee retention and drive increased profits.
An important part of employee ownership is employee engagement and responsibility. The owner will eventually want to step back and have the employees take over. That process can happen over a period of time, but succession planning is a key to the success of an EOT.
An EOT can work alongside employee share schemes introduced for key employees such as an Enterprise Management Incentive (EMI) Scheme.
There will be a range of factors an owner will need to consider in relation to their exit from their business and engaging with their advisors as early as possible is important. If you would like to discuss the options open to you and your business including converting to Employee Ownership, then please contact our Corporate team on firstname.lastname@example.org.