In celebration of Employee Ownership (EO) Day today, it seems fitting to delve into the rising popularity of Employee Ownership Trusts (EOTs) which have been charting steady growth over recent years. But what is driving businesses to opt for employee ownership, and how has the landscape changed over the past year? This blog will unpack these questions and look at the latest EOT statistics.
What is an Employee Ownership Trust (EOT)?
Before diving into the details, it’s worth clarifying what we mean by “employee ownership”. Here, we’re discussing businesses that are majority-owned by their employees usually through means of an Employee Ownership Trust (EOT).
An EOT is a special kind of trust that seller(s) can sell a majority ownership to, where assets (i.e. the trading company shares) are held for the benefit of the employees, both current and future. This is a very simplified explanation but you can read more about how EOTs work, their benefits and more within our EOT guide which can be downloaded here.
The latest statistics on Employee Ownership
Today to mark EO Day, The Employee Ownership Association (EOA) in collaboration with the White Rose Centre for Employee Ownership (WREOC) released the annual employee-ownership statistics for 2022. They found that:
- Between 2020 to 2022, the employee-owned sector more than doubled in size to over 1,000 employee-owned businesses.
- 2022 alone saw a total of 332 new employee-owned businesses which was another consecutive record for yearly growth. For comparison, 2021 saw 285 businesses transition to employee-owned, a record at the time.
- At June 2023, the total number of employee-owned businesses to 1,418 which represents 37% growth in just the last 12 months.
- In terms of sectors, in June 2023 the top 5 sectors for employee-ownership were:
- Professional Services – 39.1%
- Manufacturing – 15.1%
- Construction – 13.6%
- Wholesale & Retail Trade – 11.4%
- Information & Communication – 8.1%
This growing popularity comes in conjunction with a government consultation on EOTs "to ensure that the reliefs are closely targeted at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning.", which we recently discussed in more detail here.
Why are EOTs growing in popularity?
Rather than one single reason, there are many reasons why EOTs are growing in popularity, many of which we cover in more detail within our EOT guide. However, some of the headline benefits for these transactions for the seller(s) and employees are covered below:
For the seller(s), some of the main benefits of transitioning to an EOT are:
- Available Buyers Willing to Pay a Fair Price – there’s no need to look for external buyers or looking to sell to competitors. An EOT also offers an easier route to achieve a fairer price for the sale.
- Preserves Culture, Values & Legacy - many owners will want to retain the culture, values and legacy that they helped build, which is at risk with third-party sales but can be preserved through an EOT.
- Possible Tax Relief on Sale – contrary to alternative sale routes such as a traditional third-party sale or an MBO, a sale to an EOT won’t attract capital gains tax on the consideration received for the shares. A majority of the company shares must be sold to the EOT and the EOT must remain intact for the entirety of the tax year following the year in which it’s sold for this tax relief to be achieved.
The other main benefit for the seller(s) is that it helps them reward the employees that have helped them make their business a success. Of course, employees can also benefit from culture, values and independence being maintained, but they can also benefit from:
- Financial Reward Without Financial Commitment or Dependence on Sale – this ownership allows employees to share in the future profits of the business without any personal financial commitment as you commonly get with MBOs. As part of this, employees can also receive up to £3,600 in income tax-free bonuses per year.
- Greater Opportunities – owing to the structure of an EOT and the preservation of independence, employees can be presented with greater progression opportunities and a louder voice in the future of the company.
- The Combination of an EMI Scheme – it’s not uncommon for an EMI scheme, which is a type of share option scheme, to be implemented immediately following an EOT. This provides even greater benefits for key employees through options to acquire equity. This can benefit the seller(s) too, as it can help retain key staff over the duration in which the full consideration is paid to the seller(s). This is explained in more detail within our EOT guide.
How can UHY help?
Whilst there are many benefits to transitioning to EOTs, whether it’s the right exit route for each business will depend on each business’s unique circumstances and a consideration of numerous factors is imperative. To discuss if this could be an option for your business, please reach out to one of our EOT experts Alison Price at a.price@uhy-uk.com or 01462 687333.
