The transition to EOT
Professional advice
Founders & Selling Owners
Employees' Benefit
Employee Ownership Trusts are a special business model introduced by the Government to incentivise employee ownership. Put simply, it’s an indirect model where owners sell their shares to an employee-owned trust, giving the EOT (as they’re often called) a controlling interest in the business. But what’s the incentive? Well, a more engaged and productive workforce for one. But if you’re thinking financially, employee ownership trusts also come with tax benefits for owners and employees.
One of the biggest inhibitors of employee ownership is the assumption you must be a business of the size or scale of John Lewis to benefit. This isn’t the case. There’s no typical headcount for EOTs and you don’t have to fall into a narrow shortlist of sectors – just look at the range of companies in the Employee Ownership Top 50. But it’s not the best option for every company, so get professional advice before you jump in. A good place to start is to read our employee ownership guide.
We’ve completed EOT deals valued at everything from a few hundred thousand pounds to more than a hundred million. The number of employees and turnover of a business are usually irrelevant to the decision to switch to this structure. The only real limitation with an EOT is the selling shareholders can’t make up more than 40% of the total workforce.
Yes, what you’ve heard is correct – by selling to an EOT you qualify for two attractive, government-backed tax breaks. Firstly, the proceeds of the sale of shares to an EOT are exempt from capital gains tax. Secondly, when a company is owned by an EOT, it can pay annual bonuses of up to £3,600 to each employee free of income tax. There are a few tests and criteria you’ll need to meet to qualify for the tax breaks though, so get advice to make sure you comply.
To compare the benefits of an EOT compared to other employee-ownership structures, read our employee ownership guide.
Yes. Within our client base, the success stories are stacking up for employee ownership. And this is a common trend. Research by the Employee Ownership Association reports year-on-year an increase in sales and operating profits for employee-owned businesses.
The Employee Ownership Association reports a 5.2% increase in productivity for employee-owned businesses, double the UK average. More engaged, more innovative, more fulfilled – the positive cultural effects of employee ownership have a clear, favourable impact on employee output. This adds to the long-term value of converting to an EOT.
Not always. It’s often a looming business sale that prompts a business owner(s) to consider an EOT as an option, but it doesn’t need to happen at the point of exit. Some business owners choose to transition to employee ownership long before they cut ties entirely. This allows them to secure the benefits of the model early – including the tax exemptions. There are also other circumstances leading to employee ownership. For example, it may be introduced to attract, retain and motivate talented people as a business grows or at the other end of the scale to aid recovery for distressed businesses.
With a sale to a trust, employees make no financial contribution. Instead, present or future cash reserves (sometimes bolstered with additional debt finance) are used by the EOT to purchase the business from existing shareholders. The former owners are then paid from company profits, often spread out in instalments over a number of years.
There’s less need for negotiation, so the deal process itself tends to be more straightforward. But EOTs come with their own challenges. Significantly, the governance and management implications can be complex. Using advisors with experience in forming EOTs can ease the process and reduce complications.
With a robust communication plan, (we can help with this) the transition can be quicker than most other succession options. We have completed an EOT deal within two weeks of the first legal documents being issued, but you should allow three months for a timely and stress-free transition.
As your lawyers, we handle all the legal documents governing the sale. We’ll also help structure pricing provisions and buyer protections. So, very similar to a more run-of-the-mill trade disposal. But what’s different, is the deal process. With an EOT, it’s less about negotiations and more about the details of the deal structure. Our focus is on making absolutely certain the EOT is set up in the right way for you and your business, now and moving forward.
For an explanation of the difference options around employee ownership structures, read our guide.
As well as legal advice, you’ll need specialist valuation and tax advice too. We can help you find the right partners.
Seeking an independent valuation gives existing shareholders and the acquiring EOT assurance of a realistic market value. And with no capital gains tax to be paid on any proceeds from the sale, this business model adds extra value to the transaction for selling owners.
Yes, to both. But there are implications you need to consider, including how you deal with any potential conflict. We’ll guide you through the governance issues to make sure you have the relevant provisions in place.
In short, no. There’s no formal obligation to consult employees. In fact, one of the benefits of employee ownership trusts is it gives owners an immediate purchaser and cuts out lengthy sales negotiations. That said, your employees are the future owners of your business, so it’s important to put some careful thought into when and how you involve them in the process. A structured communication plan can aid the transition.
That’s entirely up to them. With EOTs, founders remain in complete control of when and how they step back. This can be tricky to navigate though as they might need to perform different roles and wear different hats as the business transitions to its new structure. We can steer you through the governance and management issues as they arise.
We’ll help you with assigning power and responsibility for the distribution of profits when formulating your EOT agreement. Strictly speaking, any profits belong to the employees. But in most cases, we’ll put in provisions to allow company directors to continue to control decisions around what needs to be retained or re-invested in the business. This can also include how profits are distributed to the employee owners. Under EOT rules, an annual, tax-free bonus of up to £3,600 can be paid to each employee.
Yes. To secure tax exemptions, the employee ownership trust must acquire a stake of 51% or more in the company. The remaining 49% can be retained by the existing owners or offered to employees, such as senior management, to buy individually.
There’s a common misconception that employee-owned companies must act as a co-operative with every decision hanging on the outcome of an employee vote. This isn’t the case. Day to day, business as usual can continue relatively uninterrupted with directors and managers free to manage the business of the company as they always have. All that changes is they’re now accountable to the trust rather than individual owners.
Initially, the EOT will use any profits to repay the remaining purchase price it owes to the shareholders. Consequently, in the early years, there’s usually little direct financial benefit on offer for employees. Once the debt to former owners is repaid, EOTs can start paying bonuses to employees with up to £3,600 per year exempt from income tax.
With all employee shares held collectively in the trust, shares aren’t registered directly to the individuals. With a more traditional employee ownership arrangement, say a management buy-out, employees hold the shares in their own names. Some companies opt for a hybrid combining indirect and direct share ownership.
We can talk you through what might work best for you, but a good place to start is to read our employee ownership guide.
Share schemes are an attractive and cost-effective way of motivating your management team. And there’s nothing in the rules governing employee ownership trusts to stop you rewarding your employees with an additional slice of the pie. Most traditional share incentive schemes can be combined with the tax beneficial employee share schemes available to a company under EOT ownership.
The business is free to remunerate all employees how it thinks fit, whether that’s through salary, bonuses or otherwise. EOT status allows the award of a voluntary income tax-free, annual bonus to each employee of up to £3600. To qualify for the tax exemption, bonuses must be offered to everyone on the same terms. It is possible, however, to differentiate on the basis of salary, length of service or hours worked. An add-on bonus can also be paid under a separate, taxable profit share plan.
We can help you navigate EOT bonus compliance. But first, if you would like to compare the benefits of an EOT compared to other employee-ownership structures, read our employee ownership guide.
If you’re considering adding your company to the 1,000 plus employee-owned businesses in the UK, you’ll first need to evaluate which form of employee ownership works for you. In our employee ownership guide we compare the direct, indirect and hybrid models. And when you’re ready to talk, our employee ownership experts can guide you through your options, so you choose the right structure for the future of your business.