Why Employee Ownership?
Employee Ownership helps companies to retain their independence and reward employees who contributed to the organisation's success, while ensuring selling shareholders receive a fair value for the company they built.
The concept is not a new one. The John Lewis Partnership was formed as an employee-owned company in 1929 by a visionary of his time, John Spedan Lewis.
The change of ownership to an Employee Ownership Trust has become an increasingly popular and compelling alternative for vendors over traditional exit routes such as sales to private equity firms or strategic buyers for a number of reasons:
- It can be arranged gradually at a pace that suits the business owners and the employees
- It keeps the company independent and preserves the founder's legacy
- It is non adversarial, saving on time, money and stress
- Successor management and key employees can still receive differential rewards as they would in a management buy-out
- It rewards employees for their loyalty.
What is an Employee Ownership Trust?
The Employee Ownership Trust ("EOT") is a structure that was created by the government in 2014 to encourage company owners to sell a controlling stake of the company to its employees.
Provided that certain rules are met, the transfer of a controlling stake in a business to an EOT provides vendors relief from any Capital Gains Tax ("CGT") that might otherwise be paid.
An EOT can also be used to pay income tax-free bonuses to staff.
How does an Employee Ownership Trust work?
An EOT is a trust established to hold shares on behalf of employees in a company.
An EOT possesses these characteristics:
- It must have a controlling interest in the company i.e. greater than 50%
- It must be established for the benefit of all employees (excluding, broadly, individuals who hold or have previously held 5% of the shares) in the company
- It must treat all employees on an equitable basis
- The EOT borrows money from lenders (third party senior, subordinated and/or vendor), with a company guarantee
- The lender takes a charge on the company’s assets
- The company makes contributions to the EOT to pay interest and fees and to repay the loan (contractual obligation)
- The loan to the EOT is repaid over time through contributions made to the trust by the company
- The shareholders sell up to 100% of the shares to the EOT for cash and a vendor note and pay no capital gains tax on the shares sold in the year the EOT acquires more than 50% of the shares
- The EOT pays for the shares with proceeds from third party financing and vendor loan; loans repaid through the contributions from the company
- Employees are eligible to receive income tax-free bonus payments up to £3,600 per employee per annum
- As an incentive to align interests, the Company may issue shares or warrants/options to key managers and employees
Note: items one to four illustrate the financing transaction, while items five and six illustrate the sale transaction. Items seven and eight are often implemented post completion.
A shared sense of ownership
It is universally accepted that highly engaged employees are more motivated, more productive, more loyal and give more of their time, creativity and talent. Most companies pay lip service to employee engagement but imagine the impact of giving employees the ultimate status of co-owners in the company.
Studies over many years have proven the positive link between employee ownership, employee engagement and performance.
How we can help you
Our employee ownership team has handled over 150 employee ownership transactions with an aggregate value of nearly £1 billion. Our team is well positioned to guide your company through every stage of the employee ownership transition process.
Our feasibility study will demonstrate how an EOT can work for your company. It includes:
We start with a meeting and a request for information that will enable us to form a view of the fair value of your company if it were to be sold to an EOT. To support our valuation work, we look at your company's intrinsic qualities and at the value of recent comparable arms-length transactions in your sector. Later in the process, the trustees will receive a formal valuation opinion reassuring them that they are paying no more than fair market value for the company.
We split the value of the company into the value that can be paid on compilation in cash and value that will be deferred and paid over time through vendor loan votes. We recommend structuring these loan notes to have the same commercial terms as would be required by commercial lender, even if you as vendor choose to waive your right under these terms. This makes it easier for the EOT trustees to justify refinancing your vendor load notes in future, clearing themselves of buyout obligations sooner rather than later.
We show the source and application of funds for an EOT transaction, including a provision for working capital and future capital expenditure. We extend this into medium term and long term illustrative financial projections to show how the business can afford to service the buyout debt with a comfortable margin of safety.
If the transaction structure requires it, and if the company has the financial capacity to support a third party capital raising, we include that option in our feasibility analysis as an optional feature.
We brief you and support you on the whole EOT process from start to finish. We act as project manager, orchestrating the input of lawyers and other professional advisers where needed. We advise you on market practice for selecting trustees and we support you in communications with your employees when the time is right.
Financing an EOT sale
We also help companies that are considering employee ownership to structure and raise capital to support change of control Employee Ownership Trust transactions, so that vendors get fair value and a path to equity.
For advice on succession planning or for a free Employee Ownership Trust feasibility analysis for your company, please call us on 020 8949 5522 or via email@example.com.
Architects, Amin Taha, transition to Employee Ownership
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Employee Ownership Trusts: The Business sale alternative
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31 years' experience in employee ownership trust sale transactions and helping companies finance the sale transaction.
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