Although classed as a less common route for exiting a company, selling to an Employee Ownership Trust (EOT) has many advantages, including substantial tax benefits for the shareholder.
EOTs are likely to become a more common exit route, following the new Labour Government’s 2024 Autumn Budget, in which a rise in the higher rate of Capital Gains Tax (CGT) was announced.
While the rise from 20% to 24% was nowhere near as steep as experts predicted, it nevertheless makes an EOT an even more appealing option for company owners considering an exit.
Trade deals and private equity investments are the more prolific types of acquisition, but EOTs join alternatives such as management buy-ins and buy-outs, that are well worth considering.
What is an EOT?
One is established on behalf of, and for the long-term benefit of, a company’s employees.
Staff will be incentivised to contribute to the future success of the company – although it is important to distinguish that the employees will not become the owners. That will be the Trust, and the company will still be run by a board of directors.
Advantages of an EOT for the exiting shareholder:
You have full control of the sale process
By this, we mean you are not at the mercy of an external party with their own ideas about how they want the sale to unfold. Instead, you form the EOT, and you set your own pace to a timeline that suits you. If you face any issues, speak to an expert.
There is no haggling over price
At Knightsbridge, when we preside over an EOT deal, our team will arrange an independent valuation, and the price is then agreed between you and the trustees of the EOT. It is a fair market valuation and broadly equates to what a third party would be likely to pay. The pricing is set before the sale process begins, so you would not be committed to a transaction that ultimately culminates in delivering an unacceptable price.
Fewer ‘moving parts’ within the process
There will obviously still be some legal boxes to check, but much less takes place in the way of due diligence than with a trade deal. An EOT is a more collaborative than combative process.
Substantial tax benefits
As a seller, you could typically expect up to pay up to 24% in CGT alone – whereas EOT sales are completely tax-free! That said, an EOT must be executed with pinpoint accuracy to avoid being rejected by HMRC, which would mean full tax on the sale having to be paid, so having the right adviser alongside you is of the highest importance.
Advantages of an EOT for the company’s workforce
Employees do not require their own funding
The employees will not directly become shareholders themselves. Instead, the Trust becomes the shareholder. Thus, the staff do not take on any personal debt and it becomes a very low-risk venture for them.
Staff are working in their own interests first and foremost
Employees will now have a significant financial interest, as well as a voice, in the company and they will benefit from its future value. Therefore, they have greater motivation to ensure the ongoing success of the company, thereby increasing job satisfaction and productivity.
Significant tax-related benefits
Employees can receive £3,600 in tax-free annual bonuses, further encouraging high levels of commitment and engagement.
Other aspects of EOTs that should be considered
Funding
As the employees do not buy shares or contribute funds into the Trust, you may be wondering where your sale proceeds would come from. Some of it may be from the company’s cash reserves, the remainder bridged by debt – either raised externally or in the form of loan notes paid out from the company’s future earnings, usually at a preferable interest rate. There are, however, risks if the performance of the company suffers.
Control
For an EOT to work, the seller(s) must lose ultimate control of the company, which means the Trust must own 51% or more of the shareholding. The board of directors will make decisions in the best interests of the employees, with no requirement to involve the employees in their decision-making processes.
Seek expert advice
Knightsbridge offers a holistic service for sales to an EOT, with resources in all aspects of the transaction process – corporate finance, tax advisory and partner law firms who will provide the legal services to formulate and implement the sale.
As a proud member of the K3 Capital Group, the UK’s #1 mid-market UK company sales specialist, we provide in-house tax support through our sister company, K3 Tax Advisory.
Speak to an expert today.