Japanese Blossom

EOT and EMI, a powerful M&A combination of three letter anacronyms.

An Employee Ownership Trust (EOT) transaction is a key and exciting step on the employee ownership journey but is a long way from the ultimate destination. Exemplary governance and employee involvement are key to continued growth and to maximising employee ownership’s contribution to the UK economy in an environment where we are seeing exponential growth of EOT’s towards becoming a mainstream M&A (mergers & acquisition) consideration to achieve elegant management succession for many SME (small to medium-sized enterprise) business owners.

In conjunction with the Employee Ownership Association and Ownership at Work, Sue Lawrence, an experienced independent trustee director of a number of EOT companies, has co-authored an excellent paper highlighting best practice in EOT “Employee Ownership Trusts, In search of best practice” .

Perhaps, surprisingly, the paper identifies that the extent of Enterprise Management Incentive (EMI) options were, in the companies surveyed, more commonly in existence prior to transition to an EOT rather than introduced subsequently, although the paper acknowledges that use of EMI schemes are still seen as important incentivisation for key members of the leadership team.

EMI schemes in place prior to an EOT transaction will invariably be targeted towards and exercised on completion of the transaction given that it is a change of control event, with vendors selling over 50% (and often 100%) of their shares to an Employee Ownership Trust. These EMI shares should deliver a capital gain with 100% CGT exemption to the employee option holders and they will be paid in line with the other vendors, typically over a few years following the transaction. However, leavers post transaction (whether “good” or “bad”) will be paid regardless of length of service after the EOT transaction. RM2 believes that in all but the smallest businesses a well-designed EMI scheme is a key consideration post-transaction in order to retain and motivate key employees (who may in fact include the same cohort who may have benefitted from an EMI scheme pre-transaction). Register for our Webinar on the subject if you would like to know more. For those companies that are non-EMI qualifying then alternative forms of employee share scheme should be considered to motivate those employees who can significantly impact business performance.

The mix of an EOT-owned company with exemplary corporate governance and employee engagement, a well-designed EMI scheme for key employees (which can yield returns to participating employees without necessitating a further sale of the business) and a post-tax profit pool to be shared equitably amongst all employees after repayment of the vendors’ initial deferred consideration can provide a powerful incentive for a businesses’ employees to outperform non-employee-owned businesses.

50 of the best employee-owned businesses will be highlighted in the forthcoming “EO top 50 – 2022” to be published in June this year. If you’d like to start your journey towards 2023’s list please feel free to get in touch at enquiries@rm2.co.uk.