Insights

As an SME owner, you carefully consider your business's future and your legacy. Finding the right exit path often involves balancing financial returns with continuity for your employees and company culture. Traditional sales to competitors or private equity may offer good value but can disrupt the very essence of what you built. An employee ownership trust (EOT) presents a compelling alternative, a model we observe gaining real momentum as a unique and beneficial exit strategy.

We understand the complexities of choosing an exit route. This blog explores the employee ownership trust model. It explains how EOTs work, their distinct advantages, and key considerations for owners. We aim to help you determine if an EOT aligns with your objectives for a rewarding and impactful departure.

What is an Employee Ownership Trust (EOT)?

An employee ownership trust (EOT) provides a specific mechanism for owners to sell their company to a trust established for the benefit of its employees. The trust then holds a controlling stake in the business, typically 51% or more. This structure allows the business to continue operating independently, with employees benefiting from its future success.

Here is how an EOT typically works:

• Trust Formation: The existing owner establishes a trust, which then acquires a majority shareholding in the company.
• Funding the Purchase: The trust usually funds the purchase through a combination of external bank finance and deferred payments from the company's future profits.
• Benefits for Employees: Employees become indirect beneficiaries of the trust. This brings tax-free bonuses (up to a certain limit), a share in company profits, and a voice in the company's direction.
• Continued Operation: The company continues its operations with its existing management team. The trust acts as a long-term, stable owner, focused on the business's sustained success.

This model preserves the company's independence and culture while providing a clear exit for the owner.

Key Benefits of an Employee Ownership Trust

Choosing an employee ownership trust offers distinct advantages for selling owners, employees, and the ongoing business itself. These benefits often extend beyond purely financial considerations.

• For the Selling Owner:
  • Significant Tax Incentives: Sellers often benefit from 0% Capital Gains Tax on the sale of shares to an EOT, a major financial advantage.
  • Preserved Legacy and Culture: You ensure the business you built continues its mission and maintains its unique culture, avoiding the disruption of an external sale.
  • Controlled Exit Timeline: You can transition out of the business gradually, maintaining involvement for a period to ensure stability.
  • Fair Market Value: You receive a fair market price for your company, paid over time, often without the lengthy and intrusive due diligence of a trade sale.
• For Employees:
  • Enhanced Engagement and Motivation: Employees gain a vested interest in the company's success, leading to higher morale and productivity.
  • Tax-Free Bonuses: Employees often receive tax-free bonuses directly linked to company performance, up to a statutory limit.
  • Greater Voice: Employees typically gain more influence in the company's future through employee councils or representation on the board.
• For the Business:
  • Long-Term Stability: EOTs create a stable, long-term ownership structure, protecting the business from hostile takeovers or short-term profit pressures.
  • Improved Performance: Employee-owned businesses often show stronger financial performance due to increased engagement and shared purpose.
  • Attraction and Retention of Talent: The unique ownership model serves as a powerful tool for attracting and retaining skilled employees.

Important Considerations for an Employee Ownership Trust

An employee ownership trust offers many advantages, but it demands careful consideration. This exit route may not suit every business or owner.

Factors to weigh:

• Financial Structure: EOTs typically involve deferred payments, meaning you receive your sale proceeds over time rather than as a single lump sum. Assess your personal financial needs and timeline.
• Management Team Strength: The business must have a capable management team ready to lead independently. The EOT model thrives on strong, empowered leadership.
• Company Culture: An EOT works best in companies with a culture that values collaboration and employee involvement. A top-down, autocratic culture may struggle with the transition.
• Size and Profitability: While not exclusively for large companies, the business needs sufficient profitability to service any debt taken on by the trust and to fund future deferred payments to the seller.
• Complexity: Establishing an EOT involves legal, financial, and tax complexities. It demands expert advice and a clear understanding of the process.
• Employee Readiness: Assess your employees' readiness for increased involvement and responsibility. Successful EOTs foster a culture of shared ownership.

When is an Employee Ownership Trust a Good Fit?

An employee ownership trust often provides an ideal solution for specific types of businesses and owners. Consider this model if these characteristics align with your situation.

An EOT is a strong option if:

• Preserving Your Company's Identity is Key: You want to ensure the unique culture and mission of the business you built continues, rather than being absorbed by an external buyer.
• Tax-Efficient Exit is a Priority: Maximising your personal net proceeds through potential Capital Gains Tax relief is a primary financial objective.
• Your Business Has Strong, Autonomous Leadership: An existing management team is capable and eager to lead the company independently, thriving without your daily presence.
• Your Company Demonstrates Consistent Profitability: The business generates reliable profits, allowing the trust to fund the acquisition and provide ongoing employee benefits.
• You Seek to Reward and Empower Your Workforce: You believe in giving employees a direct stake in the company's future success and fostering a truly collaborative environment.
• You Prefer a Gradual Transition: You desire a phased departure from the business, allowing you to support the new ownership structure and ensure stability.

The Evoke Management Role in Your EOT Journey

Exploring an employee ownership trust demands specialist expertise across financial, legal, and strategic domains. Evoke Management provides comprehensive guidance to navigate this intricate exit pathway.

Evoke Management excels at guiding SME owners through complex exit strategies. We partner with you, integrating closely to uncover your company's true value drivers. Our team applies proven valuation methods, leveraging industry insights and commercial acumen to provide clear, actionable strategies. We help you navigate every stage, from initial planning to final execution.

Learn more about the seasoned professionals comprising the Evoke team here, and explore our expertise in strategic planning. We work to understand your goals for sale, succession, or strategic planning. We ensure you gain a clear understanding of your business's true worth. For details on the investment involved, you can review our pricing page.

Define Your Legacy with Evoke Management

An employee ownership trust offers a unique and powerful way to exit your business. It protects your legacy, rewards your employees, and provides significant tax advantages. Understanding if this path suits your specific circumstances is the first step towards a fulfilling transition.

Speak with an Evoke Management team today! We will discuss your unique situation and help you understand the potential of an EOT to meet your personal and business objectives.

Frequently Asked Questions (FAQs)

Are Employee Ownership Trusts only for large companies?

No, EOTs are increasingly popular among SMEs. While profitability is necessary to fund the trust's acquisition, many successful EOTs involve businesses with 10 to 250 employees.

How long does it take to set up an Employee Ownership Trust?

The process typically takes several months, often between 3 to 9 months, depending on the complexity of the business, the readiness of its financials, and the speed of legal and financial due diligence.

Do I have to sell 100% of my company to an EOT?

No, the trust must acquire a controlling interest, meaning 51% or more of the company's shares. You can retain a minority stake if that aligns with your personal and financial goals.

What happens to the existing management team after an EOT?

The existing management team usually remains in place and continues to run the business day-to-day. The EOT acts as the long-term owner, providing strategic oversight, but typically does not interfere with operational management.