Employee Ownership Trust (EOT) Q&A

When the time comes to exit your business, have you considered an Employee Ownership Trust (EOT)?

Growing in popularity across sectors, TC Group’s Corporate Finance Associate Director, Paula Carter, answers some of the most common questions we’re asked about EOTs.

 

WE’VE BEEN SAYING EOTS HAVE BEEN THE FLAVOUR OF THE MONTH FOR 3 YEARS NOW! WHY DO YOU THINK THIS IS?

I agree, their popularity has skyrocketed in recent years. This looks set to continue!

We’ve seen a lot of change with businesses placing increased importance on people and culture. From young professional service firms through to mature businesses, EOTs feature regularly in our discussions on succession with business owners.

Why so? An Employee Ownership Trust is a compelling exit option for business owners enabling them to provide a risk free legacy for employees, in a tax efficient manner. The success of which can be now seen by the level of employee owned businesses reporting significant improvements in operational performance, employee engagement and staff loyalty.

 

ARE THERE ANY SECTORS THAT ARE PARTICULARLY ACTIVE?

Absolutely! They’ve proven particularly popular in the Construction & Built Environment sector, manufacturing, and Wholesale and retail trade sectors, with businesses across all disciplines making the move to EOTs. It’s not surprising that this is the case given the importance of people in the sector. More than 25% of AJ100 firms have transitioned to this structure – understandable given the egalitarian nature of architects.

EOT ownership is also a valuable differentiator in a competitive labour market in which skilled professionals such as architects and engineers are highly desirable.

 

HOW DOES AN EOT DIFFER FROM A MANAGEMENT BUY-OUT (MBO)?

The main difference is that in an MBO, the Management team take direct ownership i.e. become shareholders in a company, whereas in an EOT the employees do not.

Under EOT ownership, the shares of the trading company are sold to a Trust and are held for the collective benefit of all employees. Employees can still be rewarded for their collective efforts with tax free annual bonuses of up to £3,600 p.a. each.

The other main difference is that family members of exiting owners can form part of an MBO team, whereas they are specifically excluded from the EOT. We can however advise on suitable incentive packages for family members as employees under EOT ownership.

 

WHAT ADVICE WOULD YOU GIVE BUSINESS OWNERS CONSIDERING AN EOT?

I would encourage owners to look beyond the much published tax benefits of EOTs (the initial sales proceeds are Capital Gains Tax free). Understand what it is you’re looking to achieve and what’s important to you.

With a strategic Options Review, we can add real value in assessing the suitability of all options, to ensure your chosen route is clearly aligned with your overriding objectives. Contact us to book an Options Review to discuss different succession routes, the benefits and considerations.

EOTs are a great ownership model when you’ve an established and profitable business, but it’s not suitable for all. With the payment of consideration typically deferred, it’s vital that the business continues to trade successfully over the longer term. For that, the ongoing support of all stakeholders (including employees, customers and suppliers) is key.

 

FOLLOWING LAST YEAR’S CONSULTATION PAPER, IS THERE A RISK THAT THE TAX TREATMENT OF EOTS WILL BE REFORMED? 

A clamp down isn’t out of the question. That said, the proposal is largely focused on tightening the rules to prevent perceived abuse, particularly around Trust control and offshore trustee arrangements.

To encourage long term growth and sustainability within the economy, I think it’s unlikely that the tax incentives available to business owners on transition to Employee Ownership Trust will be withdrawn for the foreseeable future.

It’s not out of the question though, once the impact of any legislative tightening of rules is known.

 

HOW DO YOU SEE THE POPULARITY OF EOTS EVOLVING OVER THE NEXT 2-3 YEARS?

It’s an exciting and interesting time for business owners. The overriding attraction of EOTs for many is the ability to affect a smooth transition of ownership whilst ensuring that jobs, skills and business know-how are preserved – which ultimately results in a sustainable business legacy.

With today’s labour market so competitive, the ownership structure offers a suitable remedy to promote long term stability within the workforce.

We’ve also seen a shift in businesses embracing Equity and Inclusion; organisational values which are closely aligned with the EOT framework.

Over the next 2-3 years, it will be interesting to see how the focus on people and culture continues and whether the popularity of EOTs repeats itself.

 

If you’re considering exiting your business in the next five years, feel confident about your successions plans with an Options Review.

Speak to your Client Relationship Manager or book a no-obligation, initial consultation today.

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