However, we still find that many business owners are either not aware of this alternative exit route or that if they are, they’ll have misconceptions about how this can play out.
Therefore, in this blog, we’re going to briefly answer what is an Employee Ownership Trust, what are the advantages of this exit route and we’ll also counter some of the common misconceptions that we hear.
What is an Employee Ownership Trust?
Before we dive into the advantages and misconceptions, we should briefly explain what an EOT is in simplistic terms. Firstly, employee ownership refers to a business that is majority owned by its employees. This can be achieved by the shares being sold from the current shareholder(s) to an Employee Owned Trust (EOT), which is a special trust where shares are held for the benefit of employees. The previous shareholder(s) will usually receive an initial consideration for the shares and the remaining debt will be paid from the trading company’s profits over an agreed timeframe.
The advantages
There are plenty of advantages which we cover in more detail in our EOT guide , but some of the main ones are:
Securing buyers & a fair price
One of the issues with third-party transactions is that buyers can often be hard to find, but even when they are found, getting a fair price for the business can then also prove to be difficult. Selling to an EOT offers a solution here, as both buyers and a fair valuation can be found without the need for interested third parties.
No gain, no loss sale for tax purposes
One of the biggest differences of using an EOT vs a traditional third-party transaction or a Management Buy Out is that, subject to relief conditions being met, the seller will not have to pay capital gains tax on the consideration that they receive for the shares.
Reward employees
Many business owners will feel they owe a lot of their business’s success to their employees, so transitioning to an EOT can be a way to protect and reward these employees. This route can offer employees certainty over the future ownership of the business as well as provide a way that the business can pay annual bonuses of up to £3,600 income tax-free each year to each employee.
Retain legacy, culture & values
Many business owners will have a sense of pride in the business that they’ve built, as this business is part of their legacy. Selling to an EOT can be a way to retain the company’s legacy and independence, but also its culture and values which can quickly diminish or shift with third-party sales.
The misconceptions
For those that have heard of EOTs and employee ownership, it’s not uncommon that they may have some misconceptions. Some of the common ones are:
EOTs are only for large businesses
Often when business owners think of employee-owned businesses, the most prominent example that will spring to mind will be John Lewis. As a result, this has perhaps driven the misconception that EOTs are only for large businesses.
However, evidence has shown that the positive influence of employee ownership is even stronger in smaller firms. Due to this, we’re seeing wide-ranging sizes of SMEs transition to employee ownership.
Everyone is equal
Business owners may be concerned that once transitioning to employee-owned, all employees are effectively equal and will have a say in every decision. However, it’s not true that employee ownership will effectively result in one vote per person with all decisions. Employee-owned businesses will still have senior leaders and a board of directors to guide the business day-to-day. However, major decisions would require input from the trustees (as it would have previously, but with the board of directors).
People can’t lose their jobs so there’s a ‘free rider’ problem
One misconception, mainly from employees, is that the ‘ownership’ in employee ownership effectively means that they cannot be sacked. However, as they don’t have direct ownership, employees that underperform can still lose their jobs. This ownership, whilst indirect, can also still tend to create more accountability with employees and empower them to call out underperforming staff.
How we can help
Of course, each business will have its own unique circumstances and each business owner will have different objectives when planning an exit. Therefore, it’s important that professional advice is sought from an EOT specialist. To discuss this, please feel free to reach out to one of our EOT experts Alison Price on a.price@uhy-uk.com or 01462 687333.
For further information on Employee Ownership Trusts, please contact James Foster here. You can also download our comprehensive EOT guide below:
