Employee ownership is becoming ever more popular, as existing shareholders look to retire and consider alternative business structures for selling their shares, instead of the well-trodden path of a vendor initiated management buy-out or a third party disposal. In this article we consider employee ownership in respect of a limited company acquired by way of an employee ownership trust.
What is an Employee Ownership Trust (EOT)
An EOT is a form of discretionary trust which is usually established in order to acquire shares from a trading company for the benefit of its employees. Due to the way that discretionary trusts operate, a corporate trustee is usually set up to manage the business affairs of an EOT with individually appointed directors.
What are the financial benefits of disposing of a trading company to an EOT?
The Finance Act 2014 (the “Act”) introduced certain tax reliefs (subject to certain qualifications) including:
- a Capital Gains Tax (“CGT”) relief which applies to vendors of businesses which are acquired by an EOT meaning that any disposal is to be treated as though “neither a gain nor a loss accrues on the disposal” i.e. no CGT is payable.
- each employee of a business acquired by an EOT are entitled to an income tax free bonus of up to £3,600 per annum (albeit that National Insurance is still payable).
Without going into detail around the requirements upon which the Act grants certain reliefs, the tax savings are an important consideration to those seeking the employee ownership model but fundamentally it is the attraction of becoming an employee owned business that is driving the popularity in the EOT model.
Are there any other benefits to an EOT model?
It has been shown in certain studies that businesses that follow an EOT model have increased employee engagement and better productivity. It is recommended that as part of any proposed EOT disposal, that employee engagement specialists are involved from the beginning to assist alongside solicitors and other valuation/finance professionals.
Another positive of the EOT model over a traditional third party disposal is that a willing third party buyer does not need to be sought when considering a disposal. As part of any third party sale, if a buyer is not known to the vendor this will usually require some form of indiscreet advertisement to different companies in the same sector (potentially involving a competitor), an EOT disposal means that this process is not required.
Without listing all of the benefits of an EOT model, any third party sale could potentially result in heavy negotiation which becomes a distraction to the vendors and potentially has an impact on the commercial success of the trading business.
What is a typical structure in respect of a disposal of a trading business to an EOT?
We would recommend getting in touch in the first instance to discuss the structure as many different types apply, including hybrid models where employee incentive plans are included and/or vendors retaining some shares (no more than 50%) but the below is an example of basic structure that we would typically see:
Are any third parties needed post completion in respect of a corporate trustee?
It is recommended that a third party independent person acts on behalf of the corporate trustee and that an employee council is set up which will appoint an employee to help govern the EOT following a disposal. The founder may also want to be on the board of the corporate trustee.
How does the EOT value and fund the acquisition of the shares in the trading company?
The price of the shares is usually calculated by a valuation expert, there are also lots of different methods for raising sufficient funds, including, paying the consideration due to the vendor on a deferred basis or by raising finance directly from a lender. We will liaise with professional valuation experts and financiers to assist with finding the right payment structure for the transaction.
Summary
The EOT model is being encouraged by the government as a more efficient and sustainable structure for businesses in this country and the number of employee owned businesses is increasing year on year. Howes Percival LLP have extensive experience of working on a variety of EOT transactions and would be happy to have a no obligation discussion with you should you feel that the employee ownership model is something to consider.
If you would like to get in touch in relation to any of the issues raised in this article, please email [javascript protected email address] or call us on 01162 473500.
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