Exploring the benefits of an Employee Ownership Trust sale

Although it is classed among the ‘alternative’, or less common, routes for exiting your company, selling to an Employee Ownership Trust (EOT) has various advantages.

And especially in the wake of the 2024 Autumn Budget, because high up on that list of plus points is substantial tax benefits for the shareholder.

While the rise in the higher rate of Capital Gains Tax from 20% to 24% was nowhere near as steep as company owners considering an exit had been led to expect by the business media, it nevertheless made Employee Ownership Trusts an even more appealing option.

Trade deals and private equity investments are the more prolific types of acquisition, but EOTs join management buy-ins and buy-outs, family offices and Initial Public Offerings in the category of alternatives that are also well worth considering.

What is an EOT?

An Employee Ownership Trust is established on behalf of, and for the long-term benefit of, a company’s employees.

It means that if you sell your business to an EOT, the 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.
• There is no haggling over price – At KBS Corporate, 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 – Probably the best advantage of all…EOT sales are completely tax-free! As a seller, you could typically expect up to pay up to 24% in Capital Gains Tax on the increase in capital value of your business. But the 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 paramount 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 business, thereby increasing job satisfaction and productivity.
• Significant tax-related benefits – Employees are able to receive £3,600 in tax-free annual bonuses, further encouraging high levels of commitment and engagement.

What other aspects of EOTs 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. But there are risks if the performance of the business suffers.

Control – For an EOT to work, the seller(s) must lose ultimate control of the business, which means the Trust has to 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.  

How can we help?

We offer 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.

Speak to us confidentially on 0161 258 0118.