Motivating your employees in an EOT controlled business
Selling your business to an Employee Ownership Trust (EOT) doesn’t necessarily mean that the commercial operation of the business will change significantly after transition. Of course, the company will still need to operate profitably, particularly if you’re still going to be paid out of post-tax company profits over the next few years.
So, amongst other things, you’ll still need to motivate key employees. That’s especially true during the period when vendor debt is being repaid, but before the stage of sharing profits fully amongst the whole team. In fact, you may well have a new management board ready to carry the business forward under its new ownership structure who will be keen to have a direct stake in the business. That direct shareholding would be in addition to their indirect interest via the EOT – often called hybrid employee ownership.
Fortunately, there’s nothing to prevent an EOT controlled business offering employee share plans with extra tax benefits. For example you could set up an Enterprise Management Incentive (EMI) share option plan for your key managers; or if you wanted to expand direct ownership for all staff, you could operate a Share Incentive Plan (SIP) which provides tax efficient share ownership.
There are some points you’ll need to think about before proceeding that are applicable particularly for EOT controlled companies, including the following:
- Protect your EOT status: Take care not to issue too many shares under your share scheme – if the EOT ends up losing control of the company (ie less than the 50%+ controlling interest), there would be significant tax consequences (and the company will also lose its ability to pay income tax free bonuses).
- Manage employee percentages: Remember if any individual has an interest in 5% or more of the shares, they will become an “excluded participator”. That means, if the shares in the EOT-controlled company are ever sold, those employees would not be able to share in the interest held by the EOT – their interest would be limited to their specific direct shareholdings.
- Plan for a marketplace: A post-EOT share scheme is generally designed on the assumption that the business will not be sold in the future, so you need to think about employees can get value from their shares. To do this, you will probably need to set up an internal market to buy shares from employees, including employees who stop working for the business. You could do this by setting up an Employee Benefit Trust (EBT) – or, if you’re setting up a SIP, the SIP trust can create a market for employee shareholders.
Setting up a share plan in an EOT business requires a good understanding of the technicalities not just of the share plan itself, but of the requirements relating to EOT-controlled companies, including knowledge of how to run an internal share market in a private company. Here at RM2 we have over 30 years’ experience of establishing and operating a variety of employee share schemes and employee benefit trusts in private companies, and, since the introduction of EOTs in 2014, in employee controlled companies.
If you’re looking to expand direct employee ownership in your EOT controlled business, contact us on firstname.lastname@example.org to arrange a call, without cost or commitment, with one of our expert advisers.