An EOT is a tax efficient exit strategy that benefits your employees and safeguards the future of your business.
When an appropriate route, an EOT is the most tax efficient way to sell your business.
An Employee Ownership Trust (EOT) is a trust that enables a company to hand over ownership to its employees.
The trust set up by the current owners for the benefit of all employees. The trust then becomes the majority owner of the business. Employee ownership means passing on ownership of the business, giving employees a stake in the company’s success, and aligning them with the company’s goals.
First thing’s first. It is important to understand what an EOT is, how it works, and what purpose it serves for exiting business owners and their companies. We recommend starting here!
The Benefits
It’s important to understand the unique advantages that an Employee Ownership Trust can offer to the business and its employees, as well as the seller. This includes potential tax benefits, continuity of the business, and a sense of ownership and involvement for employees, which can lead to increased motivation, retention and performance.
Pros and cons
There are some significant benefits to EOT transactions. It’s perhaps not surprising that EOTs are becoming very popular. However, it may not be the right choice for every business. There are some important considerations and potential drawbacks that must also be considered.
How to set up an EOT
The first step of an Employee Ownership Trust set up is to carry out a careful initial review of your personal and business objectives and consider the relative merits of an EOT compared to a trade sale or management buy-out.
For more information on whether an Employee Ownership Trust is right for your business, please visit our blog.
What is an EOT?
EOT stands for Employee Ownership Trust.
An Employee Ownership Trust (or EOT) is a business ownership model which enables the employees to gain a controlling stake in a company. The UK government introduced EOTs in 2014, hoping more companies would follow the John Lewis model.
You can learn more about what an Employee Ownership Trust is through our blog, or by contacting our corporate finance team today. Answers to further key questions can be found here.
Employee Ownership Trusts enable a company to become owned by its employees.
For this to happen, a trust must be set up for the benefit of all employees. The trust will then purchase a controlling stake in the business to become majority owner. This usually happens as part of an existing shareholder’s exit or succession planning strategy. Find out more.
An Employee Ownership Trust can be funded partly through surplus cash on the trading company’s balance sheet. For the remainder of the sale, an EOT will commonly hold a debt to the existing shareholders, which is repaid over time and taken from future profits generated by the trading company. Funding can also be sought from external funders.
You can learn more about funding Employee Ownership Trusts in our blog. For more detailed information on how Employee Ownership Trusts are funded, tailored to your own company, get in touch today.
Selling your business to an EOT brings three key tax benefits, benefitting both yourself and your employees. First, when you sell a controlling interest in your company to an EOT, the sale will be totally exempt from Capital Gains Tax. Second, when you dispose of your shares through an EOT, this will not be a chargeable transfer for Inheritance Tax.
Third and finally, employees of companies owned by an EOT are entitled to tax-free cash bonuses of up to £3,600 a year. This incentivises employees to perform well and helps EOT owned businesses attract the best talent.
Selling your business to your employees means you are breaking away from traditional corporate structure and changing the way your employees think about the company.
Employee ownership is encouraged because employee-owned companies are considered a more sustainable business model, focussed on long term investment. Business performance can also improve because employees are better incentivised and more committed to the business.
Employee-owned companies also often have high employment standards and a commitment to corporate responsibility and ethics.
Find out more about how well-suited employee ownership is for your company by reading our blog or contacting our corporate finance team today.
Well known companies owned by employees include John Lewis, Richer Sounds and the Arup Group. You can see a longer list of employee-owned companies that are trading in the UK in our blog.
Employee-owned companies are becoming more numerous, and many success stories can be read online from companies that have made the transition themselves.
The consensus among advocates is that employee-owned companies encourage greater investment and productivity and are therefore more sustainable.
You can find out more about whether an EOT is right for your company by speaking to us, or reading our blogs.
Transitioning to employee ownership, such as through selling a controlling stake to an Employee Ownership Trust (“EOT”) , requires careful planning and consideration. You must understand your reasons for selling, assess the differences between direct and indirect employee ownership, understand your shares value, and have considered succession planning carefully.
You can learn more about planning the transition to employee ownership in our blog.
There are notable tax benefits of an Employee Ownership Trust, for the selling shareholders, existing employees, and the business itself. As with all things tax, qualified advice is recommended before starting any corporate transaction.
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