Employee Ownership Trusts - KBS

Employee Ownership Trusts

More and more business owners are now considering the benefits that an Employee Ownership Trust can present as a way of securing a sale of their shares at fair market value.

An Employee Ownership Trust is where a significant and meaningful stake in the business is placed into the hands of the employees, allowing them to indirectly buy the company from its shareholders without them having to use their own funds whilst also allowing the owner to be paid market value for their shares.

EOTs also allow the sellers to retain a stake in the business if they wish, which is a common option for business owners using employee ownership as part of their retirement planning.

At least 51% of the shares in a company must be placed into an Employee Ownership Trust for a business to qualify as employee owned.

HOW IS AN EOT SALE STRUCTURED?

An EOT can be broken down into three stages:

  1. An Trustee Company is established (subject to meeting qualifying criteria) and a trustee is appointed. This becomes known as the Employee Ownership Trust.
  2. A share purchase agreement will allow the shareholders to sell their shares to the EOT following an independent valuation of the company which will determine a fair market value. The purchase price will be left outstanding through the creation of a debt owed to the shareholders by the Trustee Company.
  3. As the company trades, profits generated will be used to repay the outstanding purchase price owed to the shareholders and will be facilitated through the EOT.

THE SHAREHOLDERS’ BENEFITS

There are many benefits to a shareholder who pursues a sale to an Employee Ownership Trust, with the transaction typically being concluded at a quicker pace and often more financially beneficial.

The benefits for the business owner include:

THE BENEFITS TO THE COMPANY AND ITS EMPLOYEES

An EOT places the business in the hands of people who know the business, have a strong personal commitment to its long-term success and are highly motivated by their ownership to make it thrive.

The company benefits from ownership succession which preserves the business and its culture, a stronger performing business, a commitment to the longer term, and a more resilient and adaptable business.

The company’s employees benefit from a clear shared purpose and collaborative way of working, more commitment and engagement due to ownership, and Income Tax-free annual bonuses.

ARE THERE ANY TAX ADVANTAGES?

EOTs provide a clear framework for employee ownership, as well as offering significant tax advantages.

To obtain these tax advantages, an Employee Ownership Trust must contain a controlling interest in the company that is greater than 50%, be established for the benefit of all employees in the company, and treat all employees on an equitable basis.

For many business owners, this creates two tax breaks: those selling their shares to an EOT may do so free of capital gains tax; and once a company is owned by an EOT, it can pay annual bonuses to its employees free of Income Tax.

QUALIFYING CRITERIA

There are certain criteria that must be met in order for an EOT deal to completed:

  1. The company whose shares are transferred must be a trading company/principal company of a trading group
  2. Any benefit to employees must be on the same terms for all eligible employees
  3. The trustees must always retain at least 51% of the company’s shares
  4. The number of continuing shareholders must not exceed 40% of the total number of employees

THE NEXT STEPS

KBS Corporate’s experience makes us well-placed in advising you should you consider a potential sale to an Employee Ownership Trust. Our most recent deal involving an Employee Ownership Trust saw our clients complete a £9m deal for their agricultural business. The deal granted the company’s long serving employees the fantastic opportunity to participate in future wealth creation whilst also providing a financial exit for the outgoing shareholders on highly attractive tax terms as provided for through the EOT scheme.

Our team also recently advised our clients on the £8m sale of their South Wales-based Engineering business to its employees.

If you are interested in exploring the advantages of a sale to an Employee Ownership Trust, please get in touch with our team at sell@kbscorporate.com or call 0161 258 0118 today.

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