If you have spent years building up your business, but it’s time to step away, how can you protect your staff and the company for the future? An employee ownership trust (EOT) may be the answer.
An EOT has many advantages, not least zero Capital Gains Tax for the vendor and the possibility of income tax-free annual bonuses for employees, but the key advantages are more subtle. The business is left in the hands of the people you trust, you can incentivise your senior management team, and while you can walk away with cash in hand, you also have the option of retaining some control.
Each structure differs, and that makes an EOT attractive – you can adjust its terms according to your business, so you may involve external finance, you can defer the cash consideration for the vendor and the amount of control you retain will also vary. The feature that all EOTs share is the majority ownership of the business by its employees, with that shareholding held by a trust which acts in their interests.
I have handled several of these – in fact, we ‘re working on three, in different sectors, right now. The Covid-19 pandemic has definitely accelerated the rise of EOTs – owners want an exit route that takes a longer-term view of the business rather than a straight sale to a trade buyer (often a competitor) or to a private equity house. For those who are wary of their business being broken up as soon as the deal is done, this approach avoids loss of business identity and cohesion, as well as protecting employees.
Investing in communicating the purpose of the EOT to your employees will be worth the time and effort too – the process of transferring to a trust is just the end of one business phase, rather than the end of the business as your employees know it. You could retain your involvement too but empower your team at the same time, giving them increasing autonomy.
The tax advantages, especially when the current low rate of CGT appears to be under threat, shouldn’t be ignored. You do need to treat employees equally in terms of the tax-free bonus, but with careful structuring this does not prevent options being granted to key management over shares in the trading company.
The options can be linked to growing the underlying value of the business and, once achieved, the employees then exercise those options and sell their shares to the EOT. It is possible for them to gain from a 10% tax rate and the EOT benefits if the options are linked to the value of the business increasing which is of benefit to all employees.
One of our recent clients, Mary Morgan of Talbots solicitors, made the move to an EOT. She explained her thinking: “Employee owned businesses perform better, are more innovative and more profitable and have the security of being owned in a trust, so are not subject to being sold or taken over. It was the only decision I could make when looking to sell a significant number of my shares and, most importantly, is excellent for long-term planning and vision.”
For those who have led from the front and want to transition to a new role, where they can lead and develop their successors, an EOT gives them that opportunity while safeguarding the business. The fact that EOTs are being talked about more and advisers are becoming increasingly comfortable with them means that they are taking their rightful place in conversations about business sales and succession.