Employee Ownership Trusts: a sale alternative
Employee ownership in the UK has been thrust into the spotlight again, most recently as a succession planning alternative that can help businesses retain their independence and reward the employees who contributed to the organisation’s success, while ensuring selling shareholders receive fair value for the business they built.
The concept, however, is not a new one. The John Lewis Partnership was formed as an employee-owned business back in 1929 by a visionary of his time, John Spedan Lewis.
So why now?
The answer is simple, the Employee Ownership Trust (EOT). Introduced in the Finance Act 2014, the EOT puts the interest of the shareholders or vendors at the forefront, while enabling companies to benefit from the culture shift employee ownership promotes. The shift in focus to the vendor is critical. If there are no sellers interested in selling to an EOT, there will be no businesses sold to EOTs. The EOT legislation has addressed the historical lack of incentive to sell to the employees by providing selling shareholders with full relief from Capital Gains Tax when they sell more than 50% of the company to the EOT.
Consequently, change of ownership to an EOT has become an increasingly popular and compelling alternative for vendors over traditional exit routes such as sales to private equity firms or strategic buyer.
Typically, employee ownership happens in the case of business/owner succession, to support growth plans – attraction, retention and motivation of staff, to ‘rescue’ a business or from public service spin-outs and, of course, like John Lewis, some companies start out as employee owned.
Yes, traditional sales or merger options still exist but now you have a highly competitive third choice that allows you to protect your legacy in ways other options cannot. Given the financing structures that are available, the EOT can compete very effectively with the traditional sale alternatives and can, in many cases, provide sellers with greater gross proceeds over time that the traditional alternatives.
- By selling a minimum of 51% of the business to an EOT, you gain 100% Capital Gains Tax (CGT) exemption
- Income tax-free cash bonuses for employees
- Tax-advantaged employee share schemes for key employees
- Company remains independent
- Vendors can remain involved
- Low-risk transaction and minimal disruption
More good news
EOT transactions are not dependent on external lenders. If bank debt is used to finance part of the transaction, the vendor can provide a loan for the remainder of the purchase price. If the vendor is interested in financing the transaction in its entirety, the vendor can provide a loan for the full amount. In either case, the sale can be structured to provide vendors with a 10-12% return on their loan, a return difficult to match in today’s investment environment. The fact that you are a financial participant to the sale enables you to retain control, should you wish, whilst selling a majority stake.
Of course, potential solutions are never “one size fits all.” The EOT may not meet your objectives, but if you are planning a future away from the business, the EOT is causing a revolution in business sales and, it is worth finding out a little more.
You can download our one-page fact sheet about Employee Ownership Trusts or, for more in-depth information from an expert in employee ownership transactions, grab a copy of An Introduction to Employee Ownership Trusts by Garry Karch.
For advice on succession planning or for a free Employee Ownership Trust feasibility analysis for your company, please contact Garry Karch.