Employee Ownership Trusts (EOT) have become an increasingly popular exit strategy for business owners since the UK government introduced new legislation in 2014.
Retail giants, such as John Lewis, have gone down the EOT route, but could this be right for your business too?
Langdowns DFK is qualified and experienced to advise whether an EOT transaction is right for you and your business.
What are Employee Ownership Trusts (EOT)?
Employee Ownership Trusts (EOT) is an indirect form of employee ownership, where business owners opt to sell a controlling stake in their business.
This results in the EOT, administered by trustees on behalf of the employees, taking over as the new owner. The trust then holds all, or majority, of company shares on behalf of all employees.
The Benefits: Why Employee Ownership Trusts are so popular
Generous tax advantages
An EOT is the most tax efficient exit route available, because sellers to an EOT pay zero Capital Gains Tax. The seller can receive a higher overall return when compared with a traditional sale.
Quick and smooth sale process
As a sale to an EOT is essentially an internal transaction, involving no third parties, it is easier to negotiate. The sale process is often quicker and smoother when compared with a sale to a third party, and the seller can benefit from fewer residual liabilities under a reduced warranty and indemnity package.
Flexibility
Sellers can sell, crystallise gain, claim relief and be paid on deferred terms, meaning sellers can step back from the business at their own pace and at a time that best suits the business.
The seller is also able to retain a minority shareholding, which is useful for owners who want to hand over control of its business to its employees, but who are not ready to fully withdraw from the business.
Employee benefits
Under EOT, annual income tax free bonuses of up to £3,600 per employee are possible. There are also share incentive schemes for second level management, which include tax efficient share option schemes or direct holdings.
Engages employees
When employees have a stake in the business, they show greater commitment and engagement and this helps to reduce absenteeism.
Better business performance
Studies have consistently shown that employee-owned businesses perform better than privately owned businesses, demonstrating greater resilience, innovation and profitability.
Does my business qualify for EOT?
There are a number of qualifying conditions which must be met in order to benefit from the associated tax reliefs.
All eligible employees benefit requirement
All eligible employees should benefit from the EOT. Individuals who currently hold, or have held 5% or more, of the target company’s shares are not considered eligible employees. Employees with less than 12 months’ continuous service can also be excluded.
Equality requirement
All eligible employees must benefit from the EOT on the same terms. However, this does not mean that all employees get equal amounts. The size of awards can be determined based on various factors including salary, length of service and hours worked.
Controlling interest requirement
The EOT must acquire and retain a “controlling interest” in the target company. A “controlling interest” is defined as owning more than 50% of the ordinary share capital, possessing more than 50% of the voting rights, and having entitlement to over 50% of the profits available for distribution by the company.
Limited participator requirement
The total count of individuals who are both 5% shareholders and officers or employees of the company, must not exceed 40% of the company’s total number of employees. This might pose a challenge for companies with a relatively small workforce compared to the number of 5% shareholders who also hold positions as officers or employees.
Trading requirement
The company whose shares are being acquired by the EOT, must either be a trading company, or the holding company of a trading company.
How Langdowns DFK can help
Our trusted company can manage the entire process:
- Review, analyse and understand sellers’ objectives and expectations. We will provide Feasibility Analysis, including financial modelling.
- Arrange, structure and negotiate commercial financing to facilitate the transaction.
- Efficiently project manage the entire transaction to minimise execution risk. Our expert team combines financing, legal processes and documentation, valuation, tax clearances and establishment of trust.
- Offer additional advice and support for the EOT trustees as required.
For a free Employee Ownership Trust consultation and information about the tax advantages, contact your local Langdowns DFK branch.
