Employee Ownership Trusts were first introduced in 2014 and since then they’ve been growing in popularity, especially for those looking for a different type of exit. There are estimated to be around 1,000 UK companies that have transitioned to majority employee ownership by this route, and the numbers keep growing.
RM2, EOT and employee share scheme specialists, explain why they are becoming more popular. There are a number of reasons, and they’re not all about tax:
A good alternative to a traditional exit/ sale.
It can be a long and costly process finding a buyer and not all will be successful, particularly if the likely candidate is a competitor. For some, it may be a strong preference that the business continues to operate with the same staff and management team. An EOT can deliver an exit without the disruption so often associated with a sale. You can also rest assured that the new owners will not look to restructure or ‘streamline’ the business (which typically translates into redundancies).
Guaranteed sale price with minimal negotiation.
The price paid by the EOT is set at a very early stage in the process, so there’s clarity for the sellers as to what they’ll receive. In addition, an EOT sale is non-adversarial and usually involves minimal negotiation. As a consequence, selling to an EOT is usually quicker, cheaper, and less stressful than a traditional third party sale.
Exit on the seller’s terms.
Whilst a majority interest must be sold to an EOT, there’s no requirement to sell all the shares – some can be retained if required. The timing of the exit is up to the owners as well – some choose to stop working for the company as soon as the transition is completed, but many prefer to continue working, using the post-transition years to develop their succession plan.
Free of capital gains tax.
As long as the conditions are met, sellers will not pay CGT when selling to the employees by way of an EOT. This can significantly add to the value the owner(s) will receive.
So, if you’re looking for an exit, it’s well worth considering an EOT, which provides tax efficiency, a flexible exit and a relatively pain-free sales process, and will create a structure to protect the business and employees for the future.
LegalEdge works with specialist EOT advisers like RM2 Partnership to help place a business into employee ownership. For more information or to chat through your options get in touch on firstname.lastname@example.org.