Selling to an Employee Ownership Trust

by Tracy Evans

27 February 2024

EMW is recognised as a leading advisor on selling to employee ownership trusts (EOTs), having immersed ourselves in this area of law since its inception in 2014. In the last 4 years we have acted on 30 EOT sales with a combined value of over £200m.

EOTs are a government initiative aimed at promoting employee ownership by giving business owners the opportunity to sell to an employee owned trust and pay no capital gains tax on the proceeds of sale. Having grown in popularity in recent years at an exponential rate, we have more recently seen a rise in professional service providers converting to limited company status for EOT succession planning purposes.

Provided the legislative structural requirements are satisfied, selling to an EOT can be a really attractive option for business owners. Aside from the tax benefits, the sale process is largely controlled by the sellers, thereby mitigating the risk of the transaction being derailed by external forces. Often with no requirement for due diligence and a truncated sale process, professional costs are generally lower than those incurred on a trade sale or management buy-out.

In our experience, particularly with owner managers, one of the main obstacles to selling is making the decision to part with the business they have worked so hard to grow, build and nurture. Selling to an EOT can make that decision easier. Business owners can retain a minority shareholding in the company and can (and, because of how the purchase price is structured, often do) continue to work in the business and shape its future. In essence, the sale can be implemented without third party imposed structural or cultural change and with no change to the people running or working in the business.

From an employee perspective, being part of an employee-owned company can increase engagement and drive performance, resulting in a more resilient, profitable, and sustainable company. Employees can also participate in an annual discretionary tax-free bonus, share in the growth of the company and, if and when the EOT sells, they will be the beneficiaries of the proceeds of sale.

Although the company is ‘employee owned’ that doesn’t 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 can and often do continue unchanged. The only limitation to business as usual post-sale is the requirement for a corporate trustee to ensure that the terms of the trust documents are followed and that the business is operated for the benefit of the employees as a whole on the same terms.

A sale to an EOT is not right for all business owners. It is likely that a large proportion of the purchase price will need to be deferred and only paid if the trading company makes sufficient profit in the future. It commonly takes 4-8 years after the sale for the owners to be paid out in full, which is why the sellers often want and need to continue working in the business.

If you would like further information or a meeting with us to discuss EOT transactions, please do get in touch.

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