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Partner Spotlight: What is Employee Ownership Trust?

03-06-2024|true

As a business owner there will come a time when you consider your exit. This can come in many forms and for many reasons, and there are several pathways you can choose to give you the best chance of meeting your priorities at that time.

Understanding what an owner is looking to achieve will ultimately determine the exit path they follow. We caught up with Tracy Evans, a Partner in the Corporate team at EMW Law, who are experts in this area to talk through a particular strategy that is sometimes over-looked, and to explain the benefits that might just tick a few more objectives off of your wish list.

Tracy commented, “The traditional paths on an exit can often leave little room for a “sale wish list”. A strategic trade sale, for example, may command the best price, but could also result in the brand, culture and identity of the business being swallowed up. This can be particularly hard for the owner-manager, whose journey starts with nothing more than an idea and is followed by many years of hard work nurturing and growing the business.

The advent of the Employee Ownership Trusts (EOT) in 2014 opened a new path and the number of owners choosing to follow it has grown exponentially in recent years.

The EOT was introduced into law to encourage employee ownership. When an EOT buys shares in a company, they are held on trust for the benefit of the company’s employees. If and when the EOT decides to sell, the employees will be the beneficiaries of the proceeds of sale.

Typically selling to an EOT works like this:

  • The EOT is set up by a trust deed. It usually has a corporate trustee with responsibility for ensuring that the terms of the trust are followed;
  • The owners of the company and the trustee engage an expert to value the company for the purpose of setting the sale price. The owners then enter into a share purchase agreement and the company is sold to the trustee;
  • Some or all of the sale price is left outstanding as a debt owing by the EOT to the owners. The debt is repaid from money earned by the company after its acquisition by the EOT.

The benefits of selling to an EOT include:

  • Assuming the legislative conditions are satisfied, no capital gains or income tax is payable by the owners on the sale proceeds;
  • The transaction can be structured without the need for third party finance (but if it is needed, Ultimate Finance are here to help);
  • There need be no change in the strategy, direction, management or culture of the business. Owner manager sellers can and often do stay on as directors and employees of the company to help drive the profit necessary to pay the deferred purchase price;
  • As the company is effectively being sold to people already running it, due diligence and other transaction costs are usually lower and the sale process truncated;
  • Provided more than 50% is sold, there is no requirement for the owners to sell the entire share capital of the company to the EOT; and
  • Employee ownership can encourage stakeholder engagement and drive performance, often resulting in a more resilient, profitable, and sustainable company. Employees can also participate in an annual discretionary tax-free bonus.

Selling to an EOT won’t be for everyone and every business. It is likely that a large proportion of the purchase price will be deferred and only paid if and when the company makes sufficient profit – it commonly takes 4-8 years after the sale for the owners to be paid out in full. However, for owners with the right “sale wish list”, it is proving an increasingly popular option.”

If you would like to discuss EOT transactions further, please speak to your Relationship Manager or our Partnerships team who can put you in contact with Tracy as part of our Partnerships offering.

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