What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a tax-efficient way for business owners to sell their company while protecting its legacy, culture, and employees. Instead of selling to a competitor or private equity, you transfer ownership to a trust that holds the business for the benefit of your employees. This can mean a smoother transition, potential tax advantages, and a motivated workforce invested in the company’s success.
The trust is managed by trustees, who are responsible for ensuring that the interests of the employees are protected.
EOTs are growing in popularity among UK business owners looking for a succession plan that rewards employees and secures long-term stability. If you’re considering selling your business but want to keep its values and people at the heart of the future, an EOT could be the perfect solution.
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:
- Planning – The Company’s owners need to consider their successor leadership team, and whether they have the appropriate attitude (potential leaders but less so risk taking leaders).
- 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.
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.
EOT Clients
