Employee Ownership Trusts (EOTs) or otherwise known as a Sale to Employees are an increasingly popular option for business owners. The attraction isn’t purely financial, but there are significant capital gains tax benefits.
vfdnet Finance Directors are seeing businesses transition to employee ownership across different sectors – consulting, professional services, manufacturing and printing are just a few. There are minimal restrictions on the size of the business, employees or turnover which makes EOTs a viable option for many business owners who have built their business to where it is today and want to leave a meaningful legacy.
vfdnet associates are working with clients to navigate them through the process. We take time to ensure you understand the benefits and implications as an EOT has got to be right for you.
vfdnet Finance Directors are supporting more businesses than before to convert to an Employee Ownership Trust. Our associate FDs often take a project management role with specialist EO lawyers to keep the budget and timeframe on track. Usually, their involvement begins with a business valuation, but that’s just the start!
We see the benefits that EOTs can provide to businesses and their employees. An introduction to what they are, how they work, considerations, and benefits for business owners are outlined below. Plus, guidance on how to know if employee ownership is right for your business. Our vfdnet experienced FDs can help you evaluate this for your business.
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a type of trust that allows employees to have a significant stake in the ownership of a business. An EOT holds shares in a company, which are then held for the benefit of the employees. The trust is managed by trustees, who are responsible for ensuring that the interests of the employees are protected.
How does an Employee Ownership Trust work?
To set up an EOT, the company’s owners sell at least a 51% controlling interest in the business to a specially formed trust. The trust then holds the shares on behalf of the employees. This means that the employees have a real interest in the ownership of the company, and can benefit from any future growth in the business.
The process of setting up an Employee Ownership Trust typically involves the following steps:
Firstly, don’t let the genie out of the lamp before you’ve consulted with your trusted financial adviser i.e. your Virtual FD! Communication in what you say, who you talk to and when is critical to the potential success of your EOT and outcomes.
Briefly, the steps are:
- Consultation – The company’s owners will need to consult with their employees to discuss the potential for an EOT and gain support.
- Valuation – A professional valuation will need to be undertaken to determine the value of the shares being sold to the trust.
- The Grand Bargain – Reconcile all stakeholders’ interests. Uncover what The Grand Bargain is and why it’s so important.
- Sale of Shares – The company’s owners will sell at least 51% of the shares to the trust.
- Creation of the Trust – The specialist EOT trust will need to be established and the trustees appointed.
- Employee Participation – The employees will need to be informed about the EOT and their participation in the scheme.
- Ongoing Management – The trust will need to be managed by the trustees, and the employees will need to be informed about the ongoing performance of the company.
Benefits to your Business
There are several benefits to moving your business to an Employee Ownership Trust. To you and your staff, including:
- Retention of Talent – Employee ownership can increase staff retention and loyalty, as employees are more invested in the success of the company.
- Improved Productivity – Employee ownership can lead to improved productivity, as employees are more motivated to work towards the success of the business.
- Tax Benefits for the Business Owner – There are significant tax benefits available to business owners who correctly set up an EOT, including 0% Capital Gains Tax (CGT) relief for the sale of 51% or more shares to the trust.
- Tax Benefits to Employees – providing payments are correctly calculated, employees can receive up to £3,600 each per year, free of Income Tax (PAYE).
- Securing an independent future – selling into an Employee Ownership Trust provides a tremendous opportunity for the right leadership team to thrive without the potential threat of an unknown trade buyer, who may not hold the same values.
- Valuation expectations – Selling your business to your employees can achieve a fair valuation that reflects the hard work you have put in to build your business, whilst not over-burdening the future business by debt. This enables your leadership and employees to build on the legacy you are passing onto them.
The financial aspects of transitioning to Employee Ownership
Considerations for Business Owners
There are several factors that business owners should take into account when considering an EOT, including:
- Control – The owners will need to be willing to give up a significant amount of control over the business.
- Cost – There will be costs associated with setting up and managing the trust, including legal and professional fees.
- Employee Engagement – The success of the EOT will depend on the level of engagement and participation from the employees.
Hear from Brian, now a former business owner about his reasons for choosing an EOT and his experience of working with vfdnet.
“For some time I had been looking for an exit but selling the company via a trade sale would leave our loyal staff with an uncertain future.
I wanted all of the team to have the security and continued opportunity to benefit from their hard work long into the future.
An Employee Ownership Trust ticked all of the boxes.
James showed us the way and came highly recommended. He recruited Christian of Spencer West to complete the legal side of things.
We could not have had a better team to take us through to completion in record time.
Thank you James for your forensic project management and Christian for explaining the legal aspects in plain English.
I would, without hesitation, recommend you both.
What else to consider?
There are several legal and financial implications associated with setting up an EOT, including:
- Trust Law – The trust will be subject to trust law, which means that the trustees will have legal responsibilities and duties. It is best to work with specialist Employee Ownership Trust lawyers, and the vfdnet VFDs have good experience of scoping the legal work, and project management to complete on time and budget.
- Employee Benefit – The EOT will need to be structured and communicated in a way that provides a clear benefit to the employees.
- Financing – The financing of the EOT will need to be carefully planned, as post transaction there will be many stakeholders whose interests need to be balanced and agreed.
vfdnet FD role in your transition to an EOT
Our Virtual Finance Directors have built up sound experience of business sales into Employee Ownership. They are not only your financial expert but they also project manage the process and are the lynch pin holding it all together. They know what a solicitor should charge and can answer or field questions, saving you time and money in fees.
Your vfdnet FD is likely to start with a business valuation using our model. Our business valuation model also helps to identify the realistic payment period for the consideration, with payment periods ranging from 5-8 years. They will talk to you about the implications, financially and practically, of what a sale to your employees will mean to you and your management team.
They then create a scope for the specialist law firm. It’s usual to take the scope to three EOT lawyers to get a comparison.
vfdnet FDs have built great relationships with solicitors who have experience with Employee Ownership Trusts so they will guide you as to who to use. Your Virtual FD will be able to lead you on the process and manage the relationship and milestones with your solicitor, help keep your EOT on track and on budget. Your vfdnet FD will draw up a deal cost budget, then project manage the deal to time and cost.
Where the Business Owner wishes to be paid more on Completion than is available in the business, bank funding needs to be sought. vfdnet FDs work with clients to draw up their narrative and financial business plans and help negotiate bank terms and covenants. We also recommend doing our Exit ReadiMap ® diagnostic review, which provides confirmation of strengths, but also reveals ‘blind spots’ which can be ironed out before the transaction. This in turn helps in preparing for the Due Diligence process, which is either required by the funders, or is good practice as part of the warranty and disclosure process.
Your vfdnet FD will walk you through all of this and do what is appropriate for your business situation.
Is an Employee Ownership Trust right for your business?
You’ll have questions, probably quite a few, that relate to your business and the people involved. Organise a chat with James Shand in complete confidence to discuss what’s involved and if you’re ready. He’s got over many years experience of making the transition to an EOT as smooth as possible for the business owner and getting you the deal you want for you and your staff.