Employee Ownership Trusts

26 April, 2021

Are you thinking of selling your business?
Want access to a tax efficient mechanism for sale?
Want to fully walk away or still benefit from future growth?
Want to incentive employees and complete the journey with them?

If any of the above resonates, then this is for you:

 

What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is a form of employee benefits that were introduced by the Government in 2014 in an attempt to encourage shareholders to restructure their business to align with the John Lewis model.

The EOT model allows the founder or business owner to transfer ownership of the company to its employees. This means that the trust now owns the company, which allows the staff to get a say in how the business is run, and any profits made are distributed amongst the staff.

The incentive for owners is that the Government introduced very generous tax breaks to encourage shareholders to move to an employee-ownership model. However, in order to qualify for the tax incentives, the EOT needs to be structured in a particular way.

 

How the process works
So you’ve decided that an EOT is the right route for your business… but how does it work?
Here’s a look at the key steps you’ll need to take:

Establish an EOT with an appointed set of trustees

  • Engage a third-party company to provide a valuation of your company
  • Sell at least 51% of your shares to the EOT through a share purchase agreement
  • On the sale of the shares, the purchase price will create a debt owed by the Trustee Company to the shareholders which will be left outstanding
  • The company will continue to generate trading profits each year and it will use these profits to make contributions to the EOT
  • The EOT will use these contributions to repay the outstanding purchase price that it owes, meaning that the EOT fully own the company Conditions
    As with any scheme, there are always conditions to the transition to an Employee Owned Trust which include:
  • At least 51% of the outgoing owners’ shares must get sold to the EOT. This means that the Trust have a controlling stake in the company but allows the outgoing owner to retain some shares if they wish.
  • All profits made by the company must be distributed equitably between the employees. The amount paid to each employee can vary according to salary, hours worked, or years at the company, but it cant be decided by employee performance.
  • The price paid to an outgoing owner must get agreed upon by an independent valuation. What are the advantages to the outgoing owner? Succession via an employee-owned trust is one the best ways to sell on your company and comes with a lot of benefits as an outgoing owner.Tax Free
    Instead of Entrepreneurs’ Relief (currently 10%), EOT is tax-free. at time of writing, which san save the owner £100,000 on every £1m of sale value.

    Speed & Simplicity
    Setting up and selling through an EOT allows the owner to leave whenever they choose and is not held up looking for investors or buyers.

    Price
    Outgoing owners will get the company’s full market value as defined by an independent valuer. The only stipulation is that it gets paid incrementally over time. Payments from the EOT to old owners, though, are tax-free.

    Legacy
    By selling to an EOT the outgoing owner retains some control by knowing that their business is in good hands with the employees who may have worked there for a long period of time. They will know the business inside out and be able to continue it successfully. This means that the legacy of the owner and the company is somewhat protected.

    Cost & Flexibility
    The cost of EOT succession is often greatly reduced as no extensive negotiations are needed. Flexibility comes in when the outgoing owners have the choice to retain up to 49% of the company shares if they wish to still be involved in the business.

    What are the advantages to the company and the employees?
    Succession via EOT is not only beneficial to the outgoing owner but can also be very beneficial to both the company and the employees.

    Continuity
    One of the most stressful parts of being an employee in a company that for sale is worrying about new management coming in and restructuring the business, putting their jobs at risk. Through at EOT sale, this is a thing of the past as employees can be assured of stability and control following the sale.

    Engagement
    As shareholders in the company, employees have a greater interest in the firm’s success, pushing them to be more engaged and have higher productivity.

    Higher Staff Satisfaction
    Employees enjoy having a say in how the business is run and its future plans. They also enjoy the annual bonuses that come from the company profit payouts, especially when they’re tax-free up to £3,600.

    Employee Owned Trusts are increasingly on the rise as a business model and it’s easy to see why, but they’re not always plain sailing, and it’s always recommended that both parties have advisors to help them through the transition.

    This is where Auria can help. We offer complete business advice and support when you’re looking to make this transition and sell your business via an EOT route.

    Why not reach out to one of the Auria team or visit our website to find out how we can make your life that little bit easier.

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