What are the key advantages of selling a business to an Employee Ownership Trust?
Recently, I raised the opportunities for business owners to sell tax efficiently to an Employee Ownership Trust (EOT). Here I outline a short summary setting out the advantages of selling to an Employee Ownership Trust, not just for the seller but also for the company and its employees.
What are the advantages of selling control to an Employee Ownership Trust?
While not an exhaustive list, there will be many advantages structuring an exit or partial exit for shareholders via a share sale to an Employee Ownership Trust including:
- The Employee Ownership Trust is generally thought of as being a friendlier purchaser and the transaction documentation may deliver a quicker and easier sale process with, in some instances, lower professional fees than what might follow a sale process involving a third party purchaser not connected to the target business
- Founder shareholder directors, who are giving up control in shareholding terms, are permitted to remain as directors post disposal and are allowed to continue to receive market competitive remuneration packages (salary, pension, healthcare, car etc)
- Employees are facilitated via the Employee Ownership Trust to indirectly buy the company from shareholders without having to raise personal funding to achieve this
- Shareholders are able to realise market value subject to the valuation being supported by an independent valuation
- Not all shareholders have to sell to the Employee Ownership Trust provided 51% passes into Employee Ownership Trust control
- Tax efficiency for the selling shareholders to an Employee Ownership Trust, no capital gains, income or inheritance tax liabilities should arise on a properly implemented disposal of a 51% controlling interest in shares to an Employee Ownership Trust.
What are the advantages of Employee Ownership Trusts for the company and its employees?
Companies controlled by Employee Ownership Trusts are able to pay (albeit subject to National Insurance contributions for the employer and employee) tax free cash bonuses annually to all employees up to £3,600 per annum (requirements as to how the bonus is paid, currently as a single lump sum) and this financial incentive and share participation via the Employee Ownership Trust should:
- Encourage increased employee engagement/commitment; and for some
- Improve business performance, for example by greater employee motivation, drive and commitment, and in some instances this may be evidenced by reduced absenteeism.
Some businesses may not be suited to be controlled by an Employee Ownership Trust, for example unless arrangements for management succession are in place or can be put in place in short order then the structure may not commercially operate effectively. In some cases, the financing of an Employee Ownership Trust led transaction may not be easily sourced. This can sometimes be resolved with the valuation being financed by selling shareholders, by loan notes (a form of corporate IOU) and which may be secured or unsecured.
In my third and final blog, I comment on current trends towards Employee Ownership Trust structured transactions and why Employee Ownership Trust structures may be an increased part of the M&A scene post COVID-19.
Tim Sadka is a Partner in Rix & Kay’s Corporate Team. With more than two decades’ experience both as a corporate lawyer and in business leadership and management roles, Tim has a proven track record of leading project teams to help businesses realise and deliver their strategic objectives.
The Rix & Kay corporate team has the resources to support Employee Ownership Trust transactions and has strong working relationships with tax, accountancy, corporate finance and business communications practitioners who are themselves well placed to offer support on a collaborative basis.