Introduced in 2014, Employee Ownership Trusts (EOTs) are an increasingly popular option for business owners seeking to exit or realise value from their business.
Recent press coverage of some larger EOT transactions, such as Richer Sounds and Aardman Animations, has led to increased interest in what EOTs are, their quirks and complications and whether they are suitable for a given business.
As experts in the field of delivering EOT transactions, we can help you to navigate the complex waters of implementing an EOT.
What is an Employee Ownership Trust (EOT)?
An EOT is a trust established on behalf of, and for the long-term benefit of your employees, which acquires the majority of the shares (minimum 51%) in your company. A sale to an EOT gives employees a significant financial interest and often a voice in the business. It also provides you as the business owner with various transactional advantages over traditional exit routes, including staying in control of the sale process and selling your business tax-free.
Once sold to an EOT, your employees can benefit from the future value of your company. Therefore, they have a greater interest and incentive to ensure the ongoing success of the business. As such EOTs are often cited as promoting greater business resilience, employee satisfaction and ultimately, profitability.
EOTs can provide a practical and viable exit solution which should be investigated by any business owner actively looking ahead at their options. Advantageous tax benefits, a smooth sales process and a fixed selling price are particular incentives, together with knowing that your legacy is secured into the future.
How we can help you
There are specific and complex rules which govern EOTs. A robust and well-run process will ensure you can benefit from the many advantages these transactions bring.
Our expert Corporate Finance and Tax Advisory teams can guide you and your business through each step of an EOT transaction. We pride ourselves on our practical and hands on approach; we roll our sleeves up and get stuck in to make even the most challenging of transactions happen.
Our transaction process is carefully designed to ensure that you meet the requirements as set down for an EOT. We will help you with each stage of your transaction, including determining your independent valuation, structuring the deal and the composition of the Trust.
Our dedicated tax experts will ensure at each stage that your transaction is compliant with EOT rules and will obtain advance clearance from HMRC – giving you the confidence you need to proceed.
We have extensive contacts with funders and so if third-party debt is the right path for you, we will secure you the best package available.
We will manage and oversee the entire process, ensuring that all parties deliver what they need to, when they need to, creating for you the smoothest transaction process possible.
When considering a sale, business owners should seek professional advice to help them to assess all of the options best suited to their circumstances.
Get in touch
If you would like more information, please contact our EOT specialists:
Adrian Howell
Managing Director
adrian.howells@quantuma.com
Holly Bedford
Managing Director
holly.bedford@quantuma.com
A free guide to employee ownership trusts
We have created a free and practical guide to provide you with an overview of how EOTs operate in practice, highlighting the realities of implementing this model in your business. Whether you are a business owner or an advisor, our expert insight, robust advice, and balanced viewpoint will ensure you have a well-rounded understanding of how EOTs can be utilised as a straightforward option to realise value from your business.
The guide covers many key areas business owners ask us about, including:
- Advantages and disadvantages of using EOTs
- The transaction process
- Pitfalls of a traditional exit route for business owners
Watch our latest on-demand webinar: Employee Ownership Trusts - The progressive way to sell a business
Frequently Asked Questions
For businesses looking to exit.
What is an employee ownership trust (EOT)?
An EOT is a special form of trust that owns the company shares for the benefit of all eligible company employees. Company owners can sell their shares to an EOT as an alternative to selling to a traditional buyer, the sale is tax-free if all conditions are met.
The EOT owns between 51% to 100% of the company shares. The sellers may still own some shares or employees may own some shares directly alongside the EOT.
How do EOTs work?
An EOT is a special form of trust that owns the company shares for the benefit of all eligible company employees. Company owners can sell their shares to an EOT as an alternative to selling to a traditional buyer, the sale is tax-free if all conditions are met.
The EOT must own a majority of the company shares. The sellers may still own some shares or employees may own some shares directly alongside the EOT.
The EOT pays for the shares using funds gifted to it by the company and sometimes through third party borrowing. A proportion of the sale price will be paid to the sellers on completion using available cash in the company and any debt raised, with the balance of the market value sale price paid by the company over time from profits.
The company is run by its board of directors as before, and the EOT is run by a separate board of directors.
The company can pay eligible employees annual bonuses tax-free up to £3,600.Any future income or gains made by the EOT from dividends or gains on a future sale of the company must be applied for the eligible company employees.
What are the pros and cons of EOTs?
Selling to an EOT can be completely tax free for sellers if all conditions are met. A sale to an EOT is also simpler and less adversarial than a sale to a traditional buyer, as there is no third party involved. There is no risk of “tyre-kickers”, losing confidential information to competitors, price chipping or extensive due diligence reviews. The sale price can be full market value.
Sellers can retain some shares and can remain involved in the business if they wish. Sellers can be comfortable that their employees will be protected in their current jobs and the company can continue to run as normal.
Employees benefit from annual tax-free bonuses and any future income or gains in the EOT itself. However, they do not need to invest any money and do not directly own the shares and do not have to be involved in any decision-making. The EOT trustees have to make decisions in the interests of the employees going forward. Employees can also feel that their jobs are more secure, as business will carry on as usual after the sale to the EOT. EOTs have been shown to result in increased productivity and employee engagement.
However, in many cases, the sellers will have to wait longer to receive their total sale proceeds than they would in a traditional sale. This is because the immediate cash is limited to spare cash in the company and any new bank debt raised for the purpose of selling to an EOT. The additional proceeds will be paid over time from company profits.
If the sellers do not intend to remain as active management, the company will need to have in place an alternative management team. Whereas a traditional buyer may have their own management team ready to take over.
What happens when an EOT sells its shares?
The EOT trustees will have to approve the sale as being in the best interests of the employees. The EOT repays any amounts still due to the original shareholders and any bank debt and pays capital gains tax on the proceeds (unless it is non-UK tax resident). The EOT will have inherited the original shareholders base cost, so this gain may be significant. The EOT trustees will then decide how to share the remaining proceeds between the eligible company employees, according to strict fairness rules set out in the EOT Trust Deed. The employees will be taxed on their payments under PAYE at their normal income tax rates. The employing company will have an employer’s NIC cost in addition.
How long does an EOT take to set up?
The EOT Trust itself can be set up quickly by a lawyer. The entire process of selling a company to an EOT will take at least 2 months but can take longer particularly if bank debt is raised to allow a higher immediate cash payment to the sellers. Sellers need to take detailed tax, legal and financial advice to ensure that the tax and legal conditions are met to achieve, and retain, tax-free treatment, and that the company can afford the seller payments over a reasonable period.
What are the qualifying criteria for EOTs?
There are many qualifying conditions to meet. The main tests initially are that:
- The EOT must acquire a majority of a trading company’s shares
- The number of company employees who are significant shareholders or their connected people compared to overall employees cannot exceed 40% before and after the sale to the EOT.
There are also a number of rules that the EOT has to follow going forward in addition to the above tests, the main one is that the trust operates in a manner that ensures that all employees benefit fairly from the EOT according to strict criteria and that the selling shareholders (and their connected people) cannot benefit from the EOT.
How does an EOT benefit the employee?
- The EOT trustees must apply all income and gains for eligible company employees. If company shares are sold in future, all funds after settling EOT debts and tax bills must benefit the eligible employees. This could represent a life-changing amount of money for the employees.
- After the company has paid the sale proceeds to the previous shareholders and repaid related bank debt, surplus profits that previously went to the business owners are now available to be shared amount the employees
- Companies owned by EOTs can also pay annual bonuses that are tax-free up to £3,600.
Is an EOT right for your business?
A sale to an EOT is an attractive alternative to a traditional company sale, particularly where a suitable buyer cannot be identified or the seller is keen to preserve their legacy and protect the interests of their employees going forward. A sale to an EOT is also simpler and less adversarial than a sale to a traditional buyer, as there is no third party involved. There is no risk of “tyre-kickers”, losing confidential information to competitors, price chipping or extensive due diligence reviews. The sale price can be full market value. Sellers can retain some shares and can remain involved in the business if they wish. Sellers can be comfortable that their employees will be protected in their current jobs and the company can continue to run as normal.
When considering a sale, business owners should seek professional advice to help them to assess all of the options best suited to their circumstances.
Read our latest EOT article: What is the current bank appetite for lending to employee ownership trusts?
