EOTs – An increasingly popular alternative succession planning model

Before we talk about this rise in popularity and the reasons behind this, we’ll first explain what an EOT is…

What is an EOT?

Employee Ownership Trusts (EOT), as the name suggests, is a way that businesses can transition to employee ownership by selling the company to a trust (i.e. the EOT). EOTs, therefore, offer an alternative exit route for shareholders than the more traditional third-party sales or Management Buyouts (MBOs). 

Are EOTs becoming more popular in the UK?

This increase in interest in EOTs isn’t just our own anecdotal experience, it’s reflected throughout the UK. According to the White Rose Centre for Employee Ownership, the employee-owned sector has doubled since 2020. Some of their other key findings in June 2022 were:

  • 2021 saw a record growth increase with 285 new employee-owned businesses
  • In June 2022, there were a total of 1,030 employee-owned businesses in the UK
  • From January – May 2022, there have already been 118 new employee-owned businesses, the current year is showing similar growth to 2021

The top 5 sectors for employee-owned businesses are: professional services (38.2%), construction (13.2%), manufacturing (12.8%), wholesale and retail (10.5%) and information & communications (9.3%). The construction industry, in particular, has had an increase in EOTs over the last few years. 

Why are EOTs increasing in popularity?

Each business owner that sells to an EOT will have their own motivations as there are various benefits to doing so, however, we’ve outlined a few of the key ones below:

Locating Buyers Willing to Pay a Fair Price
Particularly in the current climate, finding a potential buyer that will both leave the business in good hands and provide you with a fair price for exiting may prove to be difficult. Selling to an EOT removes the need for finding a buyer and allows a fair price to be obtained through an independent valuation. Importantly for employees too, this fair price doesn’t require them to use their own money. 

Tax Relief:
Providing conditions are met, including selling at least 50% of the shares to the trust, there’s also a tax benefit to selling to an EOT. For the business owners selling their shares, they’ll be able to sell them without attracting any capital gains tax. From an employee perspective, it also allows annual bonuses of up to £3,600 to be paid free of income tax. 

Retaining Company Culture:
Many business owners will tell you that their company values and culture are one of the key drivers to their success. However, many employees that have gone through a change in company ownership will tell you that often the culture and values can change post-sale. An EOT can be a way to protect your company’s culture and values that you worked hard to build, despite the change of ownership.

Rewarding & Motivating Key Staff:
For business owners looking to exit, you won’t just be saying farewell to a business you’ve helped to build, but also to the people that have helped you along the way. Therefore, it’s common that you may want to reward those people that have contributed to the success. Effectively offering them a way to become co-owners is a way you can do that, with the aim of getting greater engagement and commitment across the workforce. 

This isn’t an exhaustive list, and there are other benefits ranging from the flexibility of not all shareholders needing to sell their shares, protecting the legacy of previous owners through to the expectation of a smoother sales process. Therefore, we would always advise discussing this further to establish if a sale to an EOT could work for you. 

How can we help?

At UHY Hacker Young (East), our Corporate Finance team are experts in supporting business owners that wish to sell their business. Alongside our EOT-specialist legal advisors, we can support from the initial fact find and advice stage through to the implementation and beyond. To discuss this, please feel free to reach out to our EOT expert Kerry McCreadie on k.mccreadie@uhy-cambridge.com or 01462 687333.

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