Trading since 1988, Combined Flooring transitions to an Employee Ownership Trust
Combined Flooring has been trading since 1988, when it was established by husband and wife team Martin and Tracey Rogers. Over the years, the company developed into leading specialists providing floor flatness surveys, consultancy services, repairs and technical solutions to a variety of companies worldwide.
After some 20 years running the business, Martin and Tracey were considering retirement options. There was no appetite for a third party sale, as they wished the business to continue under the next generation of management and be run for the benefit of the existing employees who knew and understood the company.
A management buyout was considered but there was some concern from the management team as to the affordability. There was also a requirement for at least one key member of the team to have a larger stake in the business to reflect his leading role.
For Martin and Tracey, the creation of the Employee Ownership Trust (EOT) in 2014 couldn’t have come at a better time. By selling a controlling interest to an EOT, they achieved a total exemption from capital gains tax, an even better outcome for them than the 10% entrepreneurs’ relief rate applicable for an alternative sale. The EOT allowed the business to continue for the benefit of the current employees for many years to come, including the ability to pay tax free annual bonuses; and the ability to use tax advantaged plans such as EMI alongside the trust meant that key staff members could benefit from additional equity interests as appropriate.
Crucially RM2 was able to assist with the financial and funding aspects of the transaction. Using vendor loan notes meant that Martin and Tracey were able to sell 100% of their shares to the EOT immediately, obtaining the full Capital Gains Tax exemption; the loan notes are paid off over approximately eight years, depending on company profits. This enables the trust to pay off the shares over a realistic period out of company profits. The fact that the loan notes are interest bearing has an obvious financial advantage for the sellers, and also means that the whole transaction is based on commercial terms.
In addition, RM2 assisted with all the legal aspects of the transaction, including working alongside the company’s accountants to seek tax clearances, arranging an independent valuation in the company’s shares, setting up the trust company, and managing the completion process.
On 1 February 2016, Martin and Tracey sold all of their shares in Combined Flooring Services Limited to the Combined Flooring EOT. The EOT currently holds all of the shares in the company on behalf of its employees.
The EOT company at set up had four directors, all of whom were employees in the company. The job of the EOT directors is two-fold – firstly, they act as directors of the majority shareholding company in the original trading company. Secondly, they must act as trustees of the EOT itself, always acting in the best interests of the beneficiaries.
After some thought, RM2 Trustees Limited was instructed to act as a fifth corporate trustee director. This ensures that the other EOT directors are able to rely on additional independent guidance from a professional trustee.
Managing Director, Combined Flooring
“For us, the journey has been almost perfect in that the timing was ideal. Selling the business would have risked having inexperienced people running the business and unhappy employees. The EOT allows a seamless continuation of the business with the knowledge the employees will be rewarded in due course.”