Securing the future of family businesses with employee ownership trusts

For many family business owners, the question of succession is both a practical and an emotional one.

How do you ensure the legacy you have built over decades continues to thrive, while also rewarding the people who have contributed to its success? The recent decision by the founders of The Entertainer, the UK’s largest independent toy retailer, to transfer ownership to an employee ownership trust (EOT) offers a timely and compelling example of how EOTs can provide a solution that balances continuity, independence, and employee engagement.

The Entertainer: A case study in family business succession

Like many family businesses, The Entertainer has been shaped by the values and vision of its founders, with the next generation already involved in the business.

Faced with the challenge of succession, the founders have chosen to transfer their entire shareholding into an EOT. This move ensures that the business remains independent, preserves the family’s legacy, and crucially, rewards the employees who have helped build the company. Employees will become beneficiaries of the trust, sharing in the profits through tax-free bonuses and having a direct voice in the company’s future through representation on the advisory boards.

Why consider an employee ownership trust?

For family businesses, the traditional routes of succession – passing the business to the next generation or selling to a third party – each come with their own challenges. Not every family has a willing or able successor, and external sales can risk the loss of the business’s unique culture and values.

An EOT offers a third way, with several key advantages:

• Preserving independence: By transferring ownership to a trust for the benefit of employees, the business can remain independent and true to its founding principles
• Rewarding employees: Employees become beneficiaries, sharing in the company’s success through profit-related bonuses, which are often tax-free up to a certain limit
• Securing legacy: The founders’ vision and values can be embedded in the trust’s governance, ensuring continuity for customers, suppliers, and the wider community
• Engaging the workforce: Employee ownership has been shown to increase engagement, productivity, and retention, as staff have a direct stake in the business’ success
• Tax efficiency: There are significant tax incentives for both the selling shareholders and the employees, making EOTs an attractive option from a financial perspective.

How does an EOT work?

An EOT is a special form of employee benefit trust, introduced by the government to encourage wider employee ownership. The process typically involves:

1. The current owners sell a controlling interest (at least 51%) in the company to the EOT
2. The EOT holds the shares on behalf of all employees
3. The purchase price is usually funded by a combination of company cash, external finance, and future profits
4. Employees benefit from profit-sharing and have a say in the company’s governance, often through advisory boards or direct representation.

Is an EOT right for your family business?

The decision to move to employee ownership is a significant one, and not every business will be suited to this model. It requires careful planning, clear communication, and a genuine commitment to employee engagement. However, as The Entertainer’s example shows, for family businesses looking to secure their future, reward their people, and preserve their legacy, an EOT can be a powerful and positive solution.

If you are considering succession options for your family business, it is worth exploring whether an employee ownership trust could help you achieve your goals. The right structure can ensure your business continues to thrive for generations to come, in the hands of those who know it best.