How does a typical sale to an EOT work?
The diagram above represents the typical structure of a transfer of shares to an EOT where the consideration payable remains outstanding at the completion date, being settled over time from future profits generated by the company once it is under the EOT’s control.
The outline of expected transaction steps is as follows:
- A qualifying EOT is established.
- The EOT acquires more than 50% of the current issued share capital from the existing shareholders in exchange for consideration which typically will be a mixture of excess cash on the company’s balance sheet, third-party debt and vendor loan notes.
- Assuming that the company remains profitable following the transaction, the business will typically use some or all of these profits to fund the EOT which in turn will use these funds to repay the outstanding debt to the shareholder(s).
Note that there are different commercial and tax implications depending upon whether the company gifts or lends, or a bank lends, the necessary funds to the EOT.
When would you use an EOT?
- To achieve an exit where there is no obvious third party purchaser
- Allows a tax free disposal by UK individual shareholders
- Owner can retain some involvement (up to 49%)
- Share capital still available to incentivise management and key employees
Other benefits
- Aligning the goals of stakeholders and employees
- Improved employee retention and morale
- Encourages innovation at all levels
Tax benefits
- Disposals into the trust can be made free from capital gains tax and inheritance tax
- The EOT can pay annual bonuses of up to £3,600 to employees free of income tax
- A corporation tax deduction for the value of the bonuses will be available to the company
The next step
If you have any queries regarding this blog please contact Simon Denye, or your usual UHY adviser.
