Increasing attractiveness of Employee Ownership Trusts (EOTs)

Employee Ownership Trusts (EOTs) provide business owners with an alternative way to realise value by selling their shares, while also benefiting from a tax-advantaged structure.

With a more challenging macro-economy and funding environment, we are seeing disposals to an EOT becoming more attractive to business owners.

A tight labour market is encouraging business owners to look at alternative methods to attract, retain and motivate staff.

How do you structure an Employee Ownership Trust (EOT)?

The structuring of an EOT involves a controlling interest (i.e. > 51% – 100%) in a company being transferred to an employee trust, held for the benefit of all employees.

It is important to note that employees do not physically hold any shares, the relevant shares are held by the EOT for the benefit of the employees who are employed by the relevant company from time to time.

An EOT should be considered alongside other strategic exit options as there is never a ‘one size fits all’ exit plan.

Why sell to an EOT?

There are both short-term benefits and long-term benefits to selling your business to an EOT. These are:

· Provides an exit route where there is no obvious third-party purchaser

· Enables a quick and smooth exit for shareholders

· Tax-free disposal for UK individual shareholders

· Opportunity for owners to retain an equity stake of up to 49%

· Improved business performance through goal alignment of stakeholders and employees

· Greater employee retention, motivation and commitment

· Increased drive for innovation and growth

· Annual bonuses of up to £3,600 can be paid to employees free of income tax

Considerations in an EOT

Strategic

Is an EOT structure suited to the long-term goals of the business? This is a key consideration regarding whether the EOT route is suitable for your business as opposed to other strategic exit options, for example, a Management Buyout (“MBO”) or trade sale.

Business valuations

How will my business be valued? An independent valuation is typically produced to provide the trustees with confidence that they’re carrying out their duties, as well as ensuring that no tax charge arises due to shares being sold at anything other than market value

Employee communications

How will my employees react? Appropriate communication is required to capture the benefits and ensure that employees understand and appreciate the impact of EOT ownership.

Legal advice

What do I need to do to ensure legal compliance regarding EOTs? Expert legal advice is required to ensure that legal documents are drafted in accordance with the EOT legislation.

How can MHA help?

An EOT transaction requires a business owner to look beyond the immediate transaction, hence planning for an EOT transaction is more imperative than ever to ensure that the structure agreed is ‘fit for purpose’ in the years that follow.

If you are considering an EOT, our corporate finance and tax teams can assist you in your initial planning phases and advise you throughout the process. Please get in touch with a member of our team.