For a business owner looking to hand over the reins and realise their investment, a sale to an employee ownership trust (an EOT) can offer some attractive benefits. Here we outline the top ten things that you need to know about EOTs and the advantages of using the model.
10 things you need to know about an employee ownership trust (an EOT)
An EOT is a collective vehicle that acquires a majority stake in a company and then holds that interest for the long term benefit of the company’s employees.
Greater employee engagement
Employees have greater commitment to, and engagement with, a business when they have a stake in it. Studies have shown that employee owned businesses perform better, demonstrating greater resilience, innovation and profitability.
Tax advantages for the seller and on-going employees
Selling to an EOT offers tax advantages for both the seller and the on-going employees. The seller pays no capital gains tax on the sale of their shares; and employees can receive tax free bonuses of up to £3,600 per person each year.
Friendlier buyer compared to third party
An EOT will be a friendlier buyer than a typical third party. So the sale process is quicker and smoother, and the seller has fewer residual liabilities via a reduced warranty and indemnity package.
Ready-made exit for a business
A sale to an EOT provides a ready-made exit for a business. This could be useful if the seller has been unable to find a suitable third party buyer. It also provides a buyer for a family business with succession issues or a business which a founder is unwilling to sell to a competitor.
The potential for a better overall return
Because the sale proceeds are free from capital gains tax, the overall return to the seller could be higher than on a traditional sale. Alternatively, the seller could sell the shares to the EOT at a discounted price and still receive the same overall return as they would have done on a traditional sale.
Deferred consideration funded via profits
The acquisition of a controlling interest by an EOT is mainly funded via the on-going profits of the acquired company. So that company must continue to trade profitably after the sale and the consideration will be paid to the seller over time as the profits are generated.
As long as the EOT acquires a controlling interest (over 50%) in the target company, a seller can retain a shareholding. This could be useful for those who are not ready to withdraw from the business altogether but who wish to hand over control to the employees.
Majority ownership via an EOT can be combined with traditional share incentive packages for management, either via direct share ownership or via tax efficient share option schemes, without the restrictions of new external owners or investors.
Certain qualifying conditions must be met
To benefit from the associated tax advantages, certain qualifying conditions must be met. These include the EOT acquiring a controlling interest (over 50%) in a trading company, all eligible employees benefiting from the EOT on the same terms and the number of employees holding more than 5% of the shares and being officers or employees of the company not exceeding 40% of the total number of employees.