Start up a company, grow it, and then sell it to the highest bidder – job done. This is the tried and tested formula that for years entrepreneurs were reluctant to stray from. But that’s not necessarily the case anymore. Today, we’re seeing more business owners choosing a different ending – sale to their own employees. Here we discuss why in certain circumstances this can be a better exit option.
Historically, the main way to sell a business was through a trade sale – where you sell your company to a third party for a certain price and (most of the time) walk away with the cash. But more and more businesses nowadays want to see their values live on in a company, even after they’ve sold up. And they also want the people who have worked alongside them to grow their business, be rewarded for their contribution to its success. As a result, business owners are instead selling their company to their own employees rather than to a third party. This is making employee ownership, and employee ownership trusts (EOTs) in particular, increasingly popular topics in discussions around succession planning.
Now, let’s be clear from the outset – employee ownership isn’t the right route for every business sale. Certain conditions need to be met and your trust will need to be structured and managed in a certain way to qualify for tax relief and other benefits. Also, if the intention is to sell your company on again in a few years’ time, an EOT will not be the best option for your business.
Whether you should sell your business to a third party or to your employees will depend on the intentions you have for your business’s future, and whether your company meets certain criteria. Here, we outline why choosing a sale to an EOT over a conventional trade sale can be beneficial.
- Less contention, less negotiation, generally less sleepless nights
Handing over the reins of a company you’ve put your heart and soul into is already a very testing process – a competitive sale process can amplify the stress. In most cases, EOT sales are quicker transactions than trade sales and they’re uncontentious in nature. And due to only a minimal requirement for due diligence, you don’t have the added anxiety of a deal falling through at the final hurdle.
- Selling shareholders avoid a hefty capital gains tax bill
The introduction by the UK government of Employee Ownership Trusts in 2014 came with legislation offering capital gains tax relief for shareholders selling to an EOT. This means owners can sell their stake in a business to an EOT and pay zero capital gains. There’s more information on the financial benefits on our EOT FAQ page.
- If you’re struggling to attract and retain talent, employee ownership can be a compelling incentive
An EOT offers employees a share in a company’s future success. For a start-up looking to stand out in a competitive recruitment market, this can make a bigger impact than the offer of a pool table in the office canteen. There’s also the added financial benefit that EOT companies can pay a yearly bonus of up to £3,600 to each employee free of income tax.
- When the founder wants to step back but doesn’t want to make a complete exit immediately
Sometimes a founder isn’t looking for a fast exit, but at the same time recognises the need for having a well-planned succession strategy. An EOT sale offers owners the flexibility to plan when and how the sale will occur because the terms of a sale are much more within their control. For example, with a transition to an EOT, any changes to leadership can be implemented gradually. This allows owners to retain an equity stake and decide to maintain as little or as much involvement in the future of the company as they wish.
Find out more about the different structures for employee ownership in our eGuide.
- Sale to an EOT is less disruptive to culture and company values
With an EOT sale, the original company values can live on in the new structure. This makes an EOT an attractive option for founders worried about the impact of a traditional trade sale on their business’ hard-earned culture. For many family businesses and entrepreneurs, transitioning to employee ownership means they can protect their legacy and ensure the company’s future remains in line with their aims and values.
- Setting up an EOT is more straightforward (so you’ll also pay less in professional fees)
There’s less wrangling over company valuations and terms of sale. And because there’s less need for negotiation, most of the time, only one set of lawyers will be appointed. This makes the professional charges for EOT transactions lower.
- Employees are generally happier because the transition is easier and less unsettling
Selling to a third party often means a business must be integrated into a bigger entity. This can lead to job losses, restructuring, and closure or relocation of premises. This understandably can unsettle and disgruntle employees. With EOTs, there’s less potential for this uncertainty and disruption. In fact, overall, employees end up happier, more motivated and generally feeling better rewarded for their contribution.
Could employee ownership be the future for your company?
Our team of EOT experts can help you evaluate if employee ownership could work for you. The next step is to book a consultation with our employee ownership experts.
Book a meeting for an initial conversation about how an EOT could work for your business.
More EOT insights
Do employees need to agree to the company being sold to an EOT?
Can the selling shareholders retain a stake?
Will an Employee Ownership Trust work for any business?
Are employee-owned businesses as competitive as conventionally owned businesses?
Does employee ownership only come about when a business owner(s) is looking to sell up?
