What is an employee ownership trust?
Employee Ownership Trusts (EOTs) offer a highly effective way to place a business into employee ownership. They were created by the government in 2014 as a structure to hold shares in a company on behalf of the business’s employees.
EOTs can be used to allow company owners to sell a controlling stake of a business to its employees, as well as by people starting a new business that they wish to be employee-owned.
Because an Employee Ownership Trust holds the shares on behalf of the employees, it is a form of indirect employee ownership. EOTs provide a clear framework for employee ownership, as well as offering significant tax advantages for sellers.
At RM2, we believe employee ownership can be a pragmatic, and highly effective option for a wide range of businesses and that Employee Ownership Trusts offer an attractive option for business owners, companies and their employees.
So, whether you are a new start-up or the owner of an established business considering your exit strategy, we will be happy to advise you.
Call – 020 8949 5522 Email – email@example.com
How do employee ownership trusts work?
To set up an Employee Ownership Trust, the sellers or company founders will need to place a majority of the business’s shares into the trust. The EOT will then hold those shares for the benefit of all of the company’s employees.
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 sale of shares to an Employee Ownership Trust is usually paid for with third-party financing or through a loan from the outgoing business owners. This funding will then usually be repaid in instalments from the future profits of the business.
While all employees will need to be given some say in how the business is run, this does not mean that every employee needs to be on the management team. A management structure will need to be agreed and setup as part of the plan to transfer the business into an EOT.
To find out more about Employee Ownership Trusts, including how to set one up, you can download our EOT factsheet or take a look at our employee ownership FAQs.
What are the benefits of Employee Ownership Trusts?
Placing a business into an employee ownership trust can offer a variety of benefits to business owners looking to exit a business, employees of the business and the business as a whole.
Benefits of Employee Ownership Trusts for business owners
Placing a business into an EOT offers a number of benefits for business owners starting a company or looking for an exit strategy, including:
1. It is a tax-efficient way to sell a business
As long as certain conditions are met, transferring the controlling stake in a business into an Employee Ownership Trust can remove the seller’s liability for any Capital Gains Tax (CGT) that would otherwise be due on the sale. This can make the sale significantly more valuable to the outgoing owners.
2. Securing the future of your company
If you have spent years building up your business, you will no doubt want to see it and the team you have put together continue to thrive and grow. Placing your company into an Employee Ownership Trust can help to protect the business and its employees for the future.
3. Attract the best talent to your business
If you are starting a new business or running an existing company, placing it into an Employee Ownership Trust can offer a highly effective way to reward employees and keep them engaged, allowing to attract and retain the best talent.
Benefits of Employee Ownership Trusts for employees
Working for a business held in an Employee Ownership Trust offers a number of benefits, including:
1. Seeing the financial benefits of the company’s success
Each employee can receive a bonus of up to £3,600 per year income tax-free, allowing workers to see a direct financial benefit when their hard work leads to increased profits for the business.
2. Maintaining the company’s independence
When a business is sold, this can often lead to significant uncertainty for the employees, including the prospect of redundancies, as well as concerns over the way the culture or values of a business might change. Employee ownership can be a way of allowing a company to stay independent and avoid these issues.
Benefits of Employee Ownership Trusts for businesses
1. Achieving a smooth succession
Placing a business into an Employee Ownership Trust can allow for a gradual, carefully planned and managed transition, helping to keep the business running effectively on a day-to-day basis during the transition.
2. Keeping the previous owners’ experience and expertise
It is common for outgoing owners to retain a percentage of the business while taking on a reduced role, at least during an initial transition period. This can allow the business to continue benefiting from their knowledge, skills and personal connections.
3. Increasing employee engagement
By giving workers a real stake in the business, placing a company into employee ownership can massively boost employees’ sense of connection to the business, leading to greater employee engagement, productivity and loyalty.
Is an Employee Ownership Trust suitable for your business?
Employee Ownership Trusts can be a good choice for many types of businesses under various circumstances, including where:
- You are a business owner looking for a smooth exit strategy that protects your business and employees
- You are starting a new business and want to attract the best people
- You are the employees of a business and want to find a way to buy out the owners for everyone’s benefit
To see whether creating an employee ownership trust could be the right choice for your business contact our specialist team who can prepare a feasibility report for your company
How we can help make an Employee Ownership Trust work for you
Together our employee ownership team has handled more than 1,150 employee ownership transactions with an aggregate value of nearly £1 billion. We can guide your company through every stage of placing your business into an Employee Ownership Trust
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.
Speak to us about employee ownership today
For advice on succession planning, to arrange an Employee Ownership Trust feasibility analysis for your company, or simply to find out more about Employee Ownership, please get in touch.
Call – 020 8949 5522 Email – firstname.lastname@example.org
Architects, Amin Taha, transition to Employee Ownership
Download a fact sheet to find out more about EOTs
Employee Ownership Trusts: The Business sale alternative
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