16 01732 759725 OWNERSHIP TRUSTS This year marks the 10th anniversary of Employee Ownership Trusts. Here, Richard Cowley outlines their benefits for sellers, employees and businesses framework for employee ownership, selling to an EOT offers significant tax and other advantages for sall concerned. Benefits for selling owners n It is tax-efficient – selling the controlling stake in a business to an EOT is tax-free, with all sellers receiving 100% Capital Gains Tax (CGT) relief. n The seller controls the transaction – selling a business to a trust avoids the need to find a buyer, complex negotiations and necessary due diligence. n Securing the future – selling to an EOT can help to protect the business and its employees, as exiting owners typically want the business to continue to thrive and grow. n Attract talented people – selling to an EOT offers a highly effective way to reward existing employees and can help attract and retain the best talent. Benefits for employees n The financial benefits of success – typically after the selling owners have been paid, colleagues can expect increased pay as an employee profit share can be introduced. n Element of tax-free pay – each employee can receive a bonus of up to £3,600 per year tax-free. n Maintaining independence – selling to a third-party can unsettle employees, with concerns over building a relationship with a new boss, changes to working practices and the company culture. Benefits for the business n Achieving a smooth succession – transferring to an EOT can allow for a gradual, carefully planned and managed transition, enabling the business to run effectively on a day-to-day basis. n Retaining experience and expertise – typically the selling owners stay with the business throughout the transition so that the business continues to benefit from their knowledge, skills and connections. n Increased employee engagement – giving employees a genuine stake in the future of the business boosts engagement, productivity and loyalty. Key considerations Despite these benefits, exit strategies that involve transitioning a business to employee ownership are not right for everyone. n The company needs to pay for itself, so valuations are constrained by what the company can earn over the next five to ten years. n The current owners/directors continue to be responsible for succession planning. It’s important to plan for the medium and long-term, not just up to the EOT transaction. n The EOT transaction process can be quick and could be finished within three months of contacting an advisor – but you can slow the process. n There is no financial risk for your colleagues. Subject to these considerations, EOT transfers are amongst the quickest and easiest business sales possible, with seller and buyer working towards the same outcome. The transaction has little immediate impact on the business and passing ownership to colleagues who helped build the company, without them facing personal financial risk, can deliver long-term benefits, making the EOT a genuine win-win for owners and colleagues alike. Research by the Employee Ownership Association shows that in October 2023 there were at least 1,650 employee-owned businesses in the UK, with around 330 of these created in the last 12 months, the largest increase in a single year. For reasons that will become apparent, there is a growing trend for owners of a business to sell it to the employees who have helped make it worth selling rather than to a competitor they may have battled for decades. An Employee Ownership Trust (EOT) enables owners looking to exit their business to transition ownership to their colleagues without any immediate or dramatic changes in senior management. Owners must sell a controlling stake to employees but can choose to remain involved in the future of the business by retaining up to 49% of the share capital and by staying on as directors. This approach can make a smooth exit more likely by enabling the transition to a new management structure at a pace that suits the owner(s), the business and its employees. The sale of shares to an EOT is paid for by the company out of reserves and its future profit. The selling owners effectively lend the funds for the trust to buy the company from them, with a typical loan repayment period of five to six years. Third-party funding is available from specialist lenders, and is often advertised, but is far less common an approach than the one outlined above. Once implemented, the trust owns the shares on behalf of the employees, who own the business indirectly. As well as providing a clear A win-win for owners and staff Richard Cowley Richard Cowley has led RM2’s EOT advisory team since 2018. Formed in 1991, RM2 became an employeeowned business in 2019, using the Employee Ownership Trust model, which it has helped implement for more than 100 other privately owned businesses. www.rm2.co.uk
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