Is An Employee Ownership Trust Right For Your Business?

The sale to an EOT can offer the opportunity to the selling shareholders the option to either continue working in the business (which might not necessarily be of appetite to a third-party buyer in a traditional share sale) or allow them to retire and provide a full exit route.

A key incentive for the selling shareholders is the beneficial tax treatment offered, particularly the exemption from Capital Gains Tax (CGT).

The Finance Act 2014 offers 100% relief from CGT provided strict requirements are adhered to, which include (amongst others) that:

• The EOT must hold more than 50% of the company's ordinary share capital. Many EOTs own 100% of the trading company, but this does not necessarily need to be the case, and other HMRC-approved share schemes such as EMI, CSOP and SIPP Schemes can, subject to meeting the relevant eligibility criteria, also be used in connection with a company that is majority owned by an EOT; and
• The benefits of the EOT must be available to all employees who must be treated equally (subject to some limited exceptions).

The EOT model allows the business of the company to continue to operate as it has done to date and can, therefore, prove an attractive option for business owners who wish to preserve a company's independence and values, which might be lost upon a sale to a third-party buyer or in a merger with another business.

The sale of shares to an EOT can also save time and money as it provides the selling shareholders an exit without the need to find a buyer that will conduct extensive due diligence on the company and its business (following which a buyer may seek to change the terms of the proposed sale or ultimately withdraw their offer to purchase) and require the selling shareholders to give a series of warranties and indemnities relating to various aspects of the company's business.

The selling shareholders will generally lead the transaction, thus allowing the selling shareholders to set the timescale and control the implementation of the transition to EOT ownership.

For the company, the EOT ownership model can help improve productivity and, in turn, the company's financial performance, as employees feel incentivised as they have an indirect stake in the company's business.

Research by the Employee Ownership Association has shown that employee-owned businesses are proven to be 8-12% more productive than other businesses.

The EOT ownership model can also ensure the long-term security of a company's values and culture, which will likely be disrupted upon a sale to a third-party buyer or more traditional succession options.

EOT ownership can also assist with recruiting and retaining employees as it can act as a key differentiating factor of the company within the market in which it operates.