Pros & Cons of an EOT

Employee Ownership Trusts, or EOTs, are a relatively new concept in the UK, but they are becoming increasingly 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.

EOT advantages

For the employees

• For employees, EOTs can provide a sense of real ownership and pride in their work, as well as a financial stake in the success of the company.
• Employees can be directly rewarded for their hard work with annual tax free bonuses of up to £3,600 where the qualifying criteria are met.
• EOTs can also help to improve employee retention and attract the best new talent.

For the business

• EOTs are often more resilient to economic downturns than other types of businesses. This is because employees are more likely to stay with the company during tough times, and they are more likely to work hard to make the company successful.

For the exiting owner/shareholder

• When selling your controlling stake to an EOT, you are guaranteed the full market value for your shares, subject to independent valuation.
• Unlike a trade sale, you also gain certainty of exit in a clearly defined , and relatively short, time frame, meaning the whims of trade buyers cannot impact or delay the sale.
• You can also exit the business with assurances that your employees are being looked after, and that their jobs are safeguarded following the transaction.
• If the right conditions are met, the seller will benefit from an effective Capital Gains Tax rate of 0%.

EOT disadvantages

(depending on your circumstances)

• The value of your shares may be lower than what you can successfully negotiate with a strategic trade buyer. Of course, there is no guarantee that this buyer will be out there.
• Day one cash is restricted by the cash on the company balance sheet, enhanced by funds that can be raised from funders for the transaction. Deferred consideration generally makes up the remainder of the consideration, and is paid over several years. In short, you won’t usually receive all the cash for your shares immediately.
• An EOT transaction is relatively complex process, requiring significant legal and accounting assistance. Depending on your business value and size, it may not therefore be appropriate

How Shorts can help

A sale to an EOT should be considered carefully as part of a review of your exit planning options. The sale of an owner-managed business is often an emotional as well as financial decision, and factors other than just valuation and tax are important.

Shorts is proud to be a member of the Employee Ownership Association, and we are here to guide you through every step of the EOT set-up and sale process.

Whether you want to contextualise the pros and cons of an EOT for your own business or are seeking additional detailed advice that’s tailored to you, speak to our Corporate Finance team today to get started or download our free EOT guide below.