Employee Ownership Trusts (EOTs)
If you’re a business owner who is considering exiting a business, you will have various succession options available to you. Deciding upon the correct route to exit can be difficult and some of the more traditional routes to exit, such as selling to a competitor or third party, can give rise to concerns around reserving the business’s legacy, staff and culture.
Employee Ownership Trusts (EOTs) have become an increasing popular succession option in the last 10 years as they offer a solution to those issues and come with financial benefits for all those involved.
What is an EOT?
An EOT is an employment benefit trust designed to acquire and hold a controlling interest in a business on behalf of that business’s employees. It provides for an indirect form of employee ownership.
The employees acquire a stake in the business’s future and benefit from bonuses (exempt from income tax but not National Insurance contributions) and in some cases certain controls over key matters affecting the business.
EOTs in Succession Planning
To implement an EOT structure, a business will:
- Set up a qualifying EOT; and
- Sell the majority of their shares in the business (at least 51%) to the EOT for a purchase price equal to the market value of the business.
Typically, part of the purchase price will be paid on completion of the sale and part will be left outstanding as a debt owed by the EOT to the exiting business owner(s). This is because the purchase price is often funded by the business itself.
Once the sale is complete, the business owner(s), may choose to exit the business or continue to play an active role in its management. This will depend on a number of factors including the experience of the existing management team, personal goals, client relationships and business needs. EOTs are designed to be flexible and so can accommodate a management structure post sale which supports the needs of the parties involved.
Benefits of an EOT
There are a number of benefits to selling to an EOT, some of the key ones to consider are:
- Capital Gains Tax Saving: When you sell your business to an EOT, providing certain qualifying conditions are met, no capital gains tax will be payable on the sale.
- Tax Free Bonus: Following the sale, the business can pay a tax free bonus of up to £3,600 to each employee per year (national insurance still applies).
- Business Continuity and Legacy: There will be no new business owners who might wish to change the identity and values of the business. Operations continue as they always have, assuring clients that 'it's business as usual’.
- Employee Engagement: EOTs can foster a sense of pride and camaraderie which, in turn:
- Increases loyalty to the business;
- Boosts productivity; and
- Makes the business more attractive to potential new recruits.
- Business Growth: As indirect owners, the employees are invested in the business’s success and so are more motivated to ensure that the business does well. EOTs drive sustainable growth by aligning the interests of employees with the long-term success of the business.
- Simplifying Succession Planning: EOTs provide a straightforward and flexible solution to succession, removing the need to find a buyer and enter into a protracted sale process. EOTs are designed to be flexible and so owners can step back from day-to-day operations while retaining some level of involvement if desired.
If you would be interested in finding out more about EOTs and whether an EOT might be right for your business, JCP Solicitors can help.
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