Employee Ownership Trusts

In one of our recent blogs (link here) we looked at the six most common exit strategies for owners of SMEs. This month we are going to take a closer look at one of them, Employee Ownership Trusts.

Employee Ownership Trusts (EOTs) have been around since 2014, when they were introduced by the government in order to encourage company owners to sell a majority stake in their companies to employees. They are becoming more common due to the various benefits for the exiting shareholder and the employees.

The benefits of an EOT can be significant, including:

Guaranteeing a sale price – With a sale to an EOT the price will be set at a fair market value. Therefore the owners will know exactly how much they will receive from the sale. This can provide a significant level of certainty when compared to an open market sale.

Making a business sale tax-efficient – As long as certain conditions are met transferring a business into an EOT can allow the sellers to be exempt from capital gains tax.

Ensuring a smooth succession – Selling the business to its employees can ensure a gradual, carefully planned and managed process, without the need to deal with external parties.

Retaining the outgoing owners’ experience and expertise – The selling owners will often retain a minority percentage of the ownership of the business and take a reduced role, rather than exiting the business entirely. This can help facilitate a stable transition.

Boosting employee engagement – Making employees co-owners of the company gives your team a real stake in the business. This can significantly improve employees’ relationship with the business, leading to greater employee engagement, productivity and loyalty.

Keeping your company independent – Ownership by an EOT can allow your business to survive and thrive as an independent entity for many years to come.

Allowing employees to receive some remuneration free of tax – Employees will be eligible to receive income tax-free bonus payments up to £3,600 per employee per annum.

In order to obtain these advantages, an EOT must:

  • Contain a controlling interest in the company i.e. greater than 50%
  • Be established for the benefit of all employees in the company
  • Treat all employees on an equitable basis

The basic process for setting up an EOT is:

  1. The vendors (owners) sell anything from 51-100% of the business’s total shares to the EOT. The sellers will usually pay no capital gains tax on the shares sold in the year the EOT acquires more than 50% of the shares.
  2. The EOT pays for the shares with proceeds from third party financing and a loan from the owners.
  3. The owners will usually receive payments in instalments and third-party financing will be repaid through the contributions from the company from future profits.

What it means for your business

However you chose to sell your business it can be a busy and difficult time. Having the appropriate senior management team in place can help ensure that not only does a sale process happen more efficiently and the value of business maximised, but also that your business doesn’t suffer as a result.

Artemis Clarke helps business owners find finance directors that have the experience to support them. Not just to help them survive, but to help them thrive – whatever their business goals.

Speak to us about how the right financial help could make a difference to your business. Call 0117 244 1891 today.