Highlights of an EOT Transaction

by Tracy Evans

26 June 2023

Having advised on 18 share sales to employee ownership trusts with 3 more due to complete by September, with total consideration exceeding 150 million, EMW corporate team have seen a steady rise in popularity of this succession route.

A sale to an employee ownership trust (EOT), providing the legislative requirements of the structure are met, is an attractive succession route because the proceeds of sale are exempt from capital gains tax, the process can be controlled by the business owner(s) removing the risk of the transaction aborting and reducing the anxiety of the unexpected arising, the professional costs are generally lower than a usual trade sale or MBO and it is beneficial for the employees.

We find the main obstacle to selling a business is the mindset of the seller not wanting to part with the business they have grown, built and nurtured. An EOT transaction largely removes this obstacle as the seller can remain employed in the business post-sale, can continue to shape the future of the company and those they work with stay the same.

Employees also benefit from the structure as being part of an employee-owned company, if communicated well to them, should increase engagement and drive performance, resulting in a more resilient, profitable, and sustainable company. In addition it removes uncertainty over job security, the employees can participate in an annual discretionary tax-free bonus, share in the growth of the company and if the EOT sells at a later date the employees are the beneficiaries of the proceeds of the sale.

Although the company is ‘employee owned’; this does not mean each employee becomes a shareholder or that each employee has a voice over the direction of the company. The management team and board of the trading company are likely to continue to manage the business as they would have done pre-sale to the EOT. There is though a trustee company; which has the responsibility to ensure that the EOT is operated for the benefit of the employees by overseeing the generation of profits and by placing a high level of importance on non-financial benefits (for example, offering fulfilling jobs with opportunities to develop).

A sale to an EOT is not right for all business owners; unless third party finance is obtained usually only a small percentage of the sale proceeds are paid out at completion, the deferred consideration can only be paid if the trading company makes a profit thus it can take up to 4-5 years to be paid out, there is usually the need for the business owner(s) to continue in the business and the purchase price may not be as high as what may be obtained for a trade sale.

Ideal candidates for an EOT transaction are companies with a large pool of distributable reserves or those that can take on third party debt, are cash generative and those where an MBO may be difficult due to the lack of a strong management team or where the business is heavily reliant on the business owner(s).

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