Employee ownership trusts (EOTs) were introduced in 2014 via tax legislation which the government brought in in the wake of the Nuttall review. It is a vehicle which promotes or enables employee ownership of companies, along similar lines to the John Lewis Partnership.
EOTs came about after several reports had shown that in different markets around the world, employee-owned companies outperformed their peers. On the back of these findings, the government tried to introduce a way to encourage companies to become employee-owned. The way they decided to do this was to encourage the sale of shares in a business to an employee ownership trust, a new kind of trust set up specifically to hold the shares in the company on behalf of its employees at any given time. This is an indirect ownership model, where no employee directly has the right to own or sell shares, but the trust holds the shares for the benefit of the employees of the company. A significant tax break is available for those who sell to such a trust, a carrot for shareholders to encourage them to take up these new rules and to actually encourage the growth of a John Lewis economy.
Until the employee ownership trust was introduced, for those looking to sell a company, the standard options were either to look for a trade sale to a competitor or selling to a private equity fund. Many business owners may prefer the employee ownership trust as an alternative “exit” which may enable them to secure the long-term future of the company and enjoy the good will, productivity gains and tax breaks associated with passing the ownership to the workforce.
What are the key benefits of employee ownership trusts?
- Selling to an EOT is an interesting alternative way to exit a company
- It secures the long-term independent future of your company in the hands of the employees
- It generates good publicity for the company
- It fosters better employee relations going forward and a real sense of common purpose
- Research has shown employee-owned companies outperform their peers in terms of productivity and competitiveness
- The proceeds of sale may, provided the conditions are met, be received tax free by the selling shareholders
- An employee-owned company which meets the conditions is able to pay a limited income tax free bonus of £3,600 a year to its employees
Where do I start setting up an employee ownership trust?
In order to get the tax-free treatment on the sale, one of the criteria to be met is that a controlling interest in the company has to be sold to the employee ownership trust. As noted, selling to an EOT may be a nice alternative to a trade sale or a private equity sale for companies, in particular for companies with a strong group of employees, where the sellers of the company genuinely believe that they’ll be able to pass over the reins to some of the employees and that the company will continue to go from strength to strength. As such, selling to an EOT is a viable option for companies that are profitable over the medium to long-term because most employee ownership trust transactions involve the sale of the company taking place with the purchase price payable on a deferred basis, where much of the sale proceeds are paid from future profits of the company in tranches, as and when they are available.
Should I consider using an employee ownership trust?
Selling to an EOT is a reasonable alternative way to sell a profitable company. It can even provide an exit for shareholders who are looking to sell but have not received an attractive proposition from a trade buyer or private equity. It can facilitate a market value sale of your company, even where there isn’t an offer on the table from a buyer. It can, therefore, be a useful way of selling a company and having a succession plan where there otherwise might not be one.
For more information on whether an employee ownership trust is right for your business, please contact John Kahn.