Why Shareholder Employees Should Think About EOTs




Employee Ownership Trusts (EOTs) are becoming an increasingly popular ownership model that can provide significant benefits to shareholders and employees alike.

Employee-owned businesses are structured by selling the business to a trust. The Trust then operates the business on behalf of the employees.

Since 2014, these sales are 100% free of Capital Gains Tax (CGT). This is due to the belief that they increase both the productivity and the sustainability of the company. As well as bridging the gap between shareholders and employees.

According to Avondale, there are now approximately 600 employee-owned businesses in the UK and the number is growing rapidly. DTE Corporate Finance has set out below some of the main benefits and risks of EOTs. In addition to dispelling some myths about its complexity and commercial benefits.

EOT Requirements

The key requirements to qualify to become an employee owned trust are:

  • The sale must be at least 51% of the shares of the company, however many are 100%
  • The company must employ more than 7 staff members to take advantage of the EOT structure
  • A new company must be created. This will act as the employee stock ownership trust with existing shareholders selling their business shares to this EOT company
  • A purchase contract will be signed. After the sale, the company will be traded as a wholly owned subsidiary of EOT.
  • EOT valuation is subject to HMRC clearance and will be assessed by comparison to other private sale benchmarks. The Government is actively promoting the Labor Property business model

Key benefits

Below are some of the key benefits, which attract many shareholders to consider EOTs as an exit strategy:

  • Unlike an open market sale, due diligence can be significantly reduced. The deal can also be structured for an agreed period.
  • The transition from a traditional company structure to an EOT can be vendor-driven. This means that employee participation is only required upon completion. Unlike an MBO, which is typically run by a motivated management team
  • Owners may decide to phase out of the business while transferring more responsibility to management. This allows the seller to benefit from the maximum commercial value, without taxes and ensuring smooth delivery.
  • Since loan notes are often structured over fairly long periods, employee ownership can lead to higher value in many cases. EOT sales can achieve better shareholder value than commercial deals when properly structured
  • Profits are more often reinvested for growth for the benefit of the company and employees. Most employee-owned businesses pay salaries in the top quartile of their industry to senior management, along with the potential tax-free incentive bonus of £3,600 per annum for all employees.
  • EOT companies see higher staff retention and higher productivity
  • Employee-owned sales provide an optimal solution for vendors. Enabling them to exit on a commercial basis while ensuring continued business growth, economic contribution and increased employee well-being.

risks

As with all new and revolutionary schemes, there can be some risks and complexities in determining if an EOT is the best option for your business.

When considering whether an employee-owned trust is the right option for your business, there are a few potential pitfalls to be aware of:

  • A motivated commercial buyer can offer a higher exit value for shareholders. As noted above, the EOT valuation is subject to clearance by HMRC and will be assessed against other private sale benchmarks. Therefore, owners may forego the opportunity to earn high multiples if a competitive market exists.
  • Management may not have the necessary skills or appetite to take over and run the business. Developing a future management team will be critical to long-term success
  • While setting up an EOT can be straightforward, any future sale or dissolution of the trust can cause more complexities. The nature of these new trusts may lead to uncertainty about how to exit completely in the future, once established.
  • Shareholders may not be able to fully exit the business as with a conventional sale. A full succession plan will be required to establish a new board and trustees. It may take time to develop employee commitment to the new structure

EOTs can often seem very technical and complex. This can often make shareholders reluctant to consider what may be an advantageous option, both for themselves and for employees. However, DTE Corporate Finance’s extensive experience enables them to recommend the most appropriate and beneficial exit strategy tailored specifically to your circumstances. Contact DTE Corporate Finance in Manchester to discuss your business requirements on 0161 819 1910.

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