Employee Ownership Trusts

Employee Ownership Trusts (EOTs) are becoming a popular exit strategy for owners of SME businesses, but what are they, and why are they so popular?

What is an EOT?

An EOT provides a way for the owners of a business to pass control of the company over to the employees in a tax efficient way and can be likened to the “John Lewis model”.  This provides business owners with an effective exit strategy and provides longer term incentivisation for employees.  It can also be helpful where employees do not have the cash to purchase the shares from the current owners under the more traditional management buyout transaction.

How does an EOT work?

A trust is set-up with nominated trustees, and all eligible employees must have the option of being beneficiaries of the trust.  The company then sells at least 50% of it’s shares to the trust for market value. 

The purchase price for the shares is usually left outstanding and is paid out of current reserves and future profits of the company over a period of time.  Alternatively, external funding could be secured to allow the purchase price to be paid on completion. 

One of the biggest benefits of an EOT is the flexibility that it offers.  You do not need to completely exit the business.  As long as the EOT owns at least 50% of the shareholding in the company after the transaction has been completed, it is possible for you to retain a small shareholding to remain a part of the company.  It is also possible to operate share schemes in conjunction with the EOT in order to further incentivise your employees.

Advantages of an EOT

There are a number of benefits to selling your business via an EOT, including:

• There is no Capital Gains Tax on the sale of shares to an EOT, making it a very tax efficient option
• There is no need to spend time finding a buyer for your business
• It provides a long-term incentive for employees to encourage them to play an active role in the company’s growth
• Tax free bonuses of up to £3,600 per year can be paid out to all employees who are a part of the EOT
• It provides a more flexible option for business owners who do not want to fully exit their business yet

To find out more about Employee Ownership Trusts, and other strategies for exiting your business, please contact us using the details below.

Written by: Makayla Combes

(E) enquiries@advaloremgroup.uk or (T) 01908 219100 (W) advaloremgroup.uk