Employee Ownership Trusts
Employee Ownership Trusts (EOTs) are a structure that allows business owners to sell part, or all of their company to employees by transferring ownership to a trust. This approach provides tax advantages, maintains company culture, and secures the long-term future of the business under employee ownership. EOTs have become a popular exit strategy for business owners seeking to reward their employees while preserving their legacy.
Main Features
What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust (EOT) is a structure that allows the transfer of company ownership to employees via a trust, rather than through direct share purchases. Introduced in the UK in 2014, EOTs enable employees to collectively own the business, providing them with a stake in its success while offering the seller tax benefits, such as capital gains tax (CGT) relief on the sale of the company shares to the trust.
How does an EOT work?
In an EOT, the business owner sells at least 51% of their company shares to an employee trust. The trust holds the shares on behalf of employees, allowing them to benefit from the profits. The trust may borrow money to finance the purchase or use company reserves. Over time, profits from the company repay the loan, and the business becomes fully owned by the trust, allowing employees to have a voice in governance and share in the financial success.
What are the benefits of selling a business to an EOT?
Selling to an EOT offers multiple benefits:
- Tax advantages: Sellers can benefit from CGT relief on the sale of shares to the trust.
- Preserving company culture: The ownership structure ensures the business remains employee-led, maintaining company values.
- Long-term business stability: Employee ownership helps secure the company’s future and reduces the risk of external takeovers.
- Employee motivation: Employees are more likely to be motivated and engaged, as they have a direct stake in the company’s success.
- Rewarding loyalty: It provides a way for owners to reward loyal employees without the disruption of a third-party sale.
Advantages & Disadvantages
There are a number of considerations to be borne in mind before choosing to undertake an EOT, both positive and negative, and whether it is the right fit, or product for your business.
Advantages
- Tax-efficient exit: The sale of shares to an EOT is exempt from capital gains tax, making it an attractive exit strategy for UK business owners.
- Employee engagement: Employee ownership often leads to higher motivation, productivity, and long-term commitment from employees.
- Legacy preservation: Owners can ensure the business stays within the control of those who understand and value the company’s mission and ethos.
- Business continuity: EOTs reduce the risk of disruption that might arise from a sale to an external buyer, keeping the business in trusted hands.
Disadvantages
- Complex setup: Establishing an EOT requires legal and financial planning, which can be time-consuming and expensive.
- Limited access to upfront cash: Unlike selling to a private buyer, an EOT may not provide the seller with full payment upfront, depending on the company’s financial situation.
- Ongoing management: While the trust provides benefits, managing it requires ongoing administration and compliance with trust law.
- Debt financing: If the EOT is funded by loans, the company will need to service the debt using its profits, which could reduce available capital for business growth.
FAQ’s
How is an EOT funded?
An EOT can be funded through:
- Company reserves: The business may use its reserves to fund the trust’s purchase of shares.
- Debt financing: The trust may borrow money to buy the shares, with the loan repaid using company profits over time.
- Seller financing: The seller may agree to defer payment, allowing the trust to pay for the shares in instalments from future profits.
What tax benefits are available for selling to an EOT?
Selling a controlling interest (51% or more) of a business to an EOT qualifies for full capital gains tax (CGT) relief, meaning the seller does not pay CGT on the sale of shares. Additionally, companies owned by an EOT can distribute annual tax-free bonuses to employees.
Which businesses are best suited for an EOT?
EOTs work best for businesses with:
- Strong profitability: The company needs to generate enough profits to repay any debts incurred by the trust in buying shares.
- Engaged workforce: Companies with a motivated and loyal workforce benefit most from employee ownership.
- Long-term stability: Businesses looking for continuity and preservation of company culture often choose an EOT over a sale to third parties.
Do employees directly own shares in an EOT?
No, employees do not directly own shares in the company under an EOT structure. Instead, the trust holds the shares on behalf of the employees, and they benefit indirectly through profit distributions, bonuses, and governance rights. The trust ensures that the ownership remains collective, and employees do not need to buy shares themselves.
How does employee involvement work in an EOT?
In an EOT structure, employees have a say in how the company is run, typically through representation on a company board or trustee board. This allows employees to influence decisions and ensure their interests are considered in the company’s management and future direction. Employee ownership creates a sense of shared responsibility and aligns the interests of the workforce with the success of the business.
Next Steps
Given the complexity of EOTs it is essential to seek professional advice before embarking on this course. Snowball’s has a unique position with access to the whole funding market and has years of experience in this market.
Snowball will oversee the process, to take ownership of the relationship between borrower, solicitor, lender and other professionals involved ensuring a smooth journey to completion.
For an initial no obligation call or meeting, please contact us to arrange.