Selling your business and Employee Ownership Trusts
2nd December 2019
All business owners need to manage their exit at some point. This usually involves a sale or transfer of shares of some sort to perhaps an obvious successor (eg children or current management), an obvious purchaser (eg a competitor or supplier/customer looking to vertically integrate) or via the phenomenon of ‘all employee ownership’.
In most cases, there will be Capital Gains Tax (CGT) on the sale. However, an Employee Ownership Trust (EOT) can result in no CGT while also allowing the employees to receive annual income tax free bonuses of up to £3,600. The benefits are far wider because an EOT also:
- Gives the entrepreneur the chance to indirectly influence in the future of the company and
- Should provide the employees with more job security and this could even extend to other stakeholders, such as suppliers and customers, who may be comforted that the culture of the business is very likely to continue long into the future.
In overview, an EOT is simply a trust created by the company for the benefit of all its employees. The trust must acquire more than 50% of the share capital from the current shareholders for an agreed fair value. Generally, the proceeds are left outstanding as a debt due by the trust that is repaid gradually by the company making gifts to the trust from its future profits. However, it is also possible for the trust to borrow funds to repay the debt earlier, but this requires careful analysis.
As with anything that provides tax reliefs, EOTs need to be navigated carefully. From a practical perspective, an EOT requires all employees to want to become quasi ‘owners’ of the company, with the potential risks and rewards that can entail. In addition, the structure of the required EOT (including whether or not it is UK resident), its rules for governance and the individuals to be involved as the trustees need careful consideration.
An EOT will not suit everyone, but for those that it does, the benefits are very real and it is worth considering, even if there may be a third party buyer for the business in the short to medium term, if only to discard it. The most high profile example of employee ownership is John Lewis, so while an EOT may be best suited to professional services businesses, it can appeal to many others. It is only available to companies so partnerships and LLPs will need to consider a restructure before using an EOT.
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