In this article, UNW’s Chris Wilson explores the essentials of EOTs, discussing what they are, some of the associated benefits, whether they are right for every business, and how to prepare for a successful transition.
Employee Ownership Trusts (EOTs) were introduced by the Finance Act 2014 and have since emerged as a popular solution for businesses considering their long-term strategy, particularly around the common themes of succession, value realisation, and future ownership. In the Autumn Budget, changes announced to the tax rules on EOTs seemed to indicate that they are here to stay. Articles on EOTs sometimes focus on the tax benefits, however those benefits should be thought of as additional. Given the right circumstances, they can represent an excellent commercial solution.
Who is this relevant to?
Private, owner-managed businesses often face common topics when evaluating any exit, including succession planning and value crystallisation, whilst also looking to preserve the culture (and legacy) that has been established over the long-term. When considering how these objectives can be delivered through, for example, a trade sale, private equity investment or management buy-out, it is important to also assess a sale to an EOT.
What is an Employee Ownership Trust?
An EOT is a model whereby a company is owned and controlled by a trust established for the benefit of its employees. This structure goes beyond simple ownership – it places the company’s purpose and operation firmly in the collective interest of its workforce. For businesses seeking a way to reward and retain employees while maintaining their culture, EOTs can provide an ideal solution.
In the right circumstances, the benefits of an EOT extend to both employees and sellers, making it a compelling option for transitioning ownership.
What are the benefits?
- For employees. EOTs can help preserve the culture of the business and provide job security, especially compared to traditional business sales where redundancies can occur as operations are consolidated. Employees also gain peace of mind knowing the company’s focus remains on their collective interests. Additionally, there are also significant financial perks, including the potential to receive tax-free bonuses of up to £3,600 annually.
- For sellers. The tax advantages are notable – provided the relevant conditions are satisfied, the selling shareholders should not pay ANY capital gains tax, compared to a headline rate of 24% (before Business Asset Disposal Relief) with other transaction types. Sellers also gain the assurance that their business’ legacy will continue, which can be particularly important for independent, privately-owned businesses. Additionally, EOT transactions tend to be quicker (and therefore less expensive) to effect compared to sales to trade buyers or private equity firms, with fewer marketing demands, reduced due diligence (if any), and streamlined legal negotiations.
Is an EOT the right choice?
The benefits of an EOT make it an attractive option, but it should be weighed against the merits of other alternatives, such as a trade sale, private equity investment, or a management buy-out.
In determining which option is best for the shareholders and the company, a clearly defined set of transaction objectives should be developed and appraised against each of the opportunities to ensure the best outcome is delivered.
How to prepare for an EOT Transition
As with any significant transaction, preparation is key to ensure:
- The best valuation, balancing value to the sellers with affordability for the company; and
- Success of the company post-transaction under new ownership.
To ensure the best possible outcome, there are a few critical areas to focus on:
- Succession planning. A business heavily reliant on a single individual or a small group of key people may face challenges in valuation and long-term stability. Building a strong management team not only enhances the company’s value but also ensures smoother operations after the transition.
- Culture. Businesses that prioritise an employee-centred culture before the deal are better positioned to maintain morale and continuity afterward. This proactive approach can help employees adapt to the new structure with minimal disruption.
- Deal structure. The value of an EOT is typically determined by a combination of market value and what the company can afford, taking into account free cash, future cash flows, and potential debt. Ensuring that the structure is fair and workable for both the seller and the company is key to success.
- Trustee board. Once the transaction is complete, the trustees govern the company, and they must act independently of the sellers. Identifying individuals with the right skills and alignment with the company’s values is critical to maintaining effective governance.
- Expert advice. Advisors with a track record of working with EOTs bring invaluable insights and can make all the difference. Advice on a transaction can include corporate finance, tax and legal advisors, who work together to help businesses navigate potential pitfalls and optimise the structure of the deal. Their guidance can also enhance post-deal governance, ensuring the EOT delivers lasting benefits for both employees and the business.
How can UNW help?
UNW can provide its multi-disciplinary services at every stage of a transition to an EOT. These services include:
- Establishing whether a sale to an EOT is right for the business and its shareholders;
- Advising on the sale to an EOT; and
- Working with the business long after the transaction under EOT ownership.
As result of our combined experiences, we are fully versed in all aspects of EOTs, including benefits, common misconceptions, transaction structuring and post-transaction operations.
If a sale to an EOT is an option you are considering for your business, we are available to have a conversation to discuss EOTs and answer any questions you may have.