What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) holds a company’s shares on behalf of its employees.

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Why Employee Ownership?

A sale to an EOT delivers value and certainty for owners, whilst providing an engaging, rewarding and resilient environment for employees.

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An increasingly popular option

The sector, employs more than 200,000 people and generates more than £30bn of UK GDP.

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A boutique corporate finance business

Focusing on Employee Ownership yet being experienced across the wider corporate finance deal spectrum, RVE are ideally qualified to advise on whether a sale to an employee ownership trust makes sense for your business.

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EMPLOYEE OWNERSHIP

Advantages of selling to an Employee Ownership Trust (EOT)

You sell at a fair market price

Value determined by RVE’s independent valuation at market price

You control the sale process

No external third parties involved

No external financing is required

Cash flow from the business used to finance the transaction

Sale possible when other exit routes closed

Sometimes practically or emotionally difficult to sell to competition or third party

Transaction costs are low

Significantly lower professional fees than other exit routes

Deal execution risks are low

In-house process that you control

You have flexibility in structuring the deal

Structure the deal in a way that makes sense both for you and your employees

You retain control during earnout

No external third parties with possibly conflicting interests

0% CGT payable

Selling to an employee ownership trust is exempt from CGT

Tony Willis, Founder - Renaissance Leadership

“When I started to examine the options to realise value for my business, it became clear that the traditional exit route of a sale to a competitor or a financial buyer would not achieve my goals. Since becoming employee owned the business has continued to thrive. Gerry gave excellent advice, structured the transaction effectively, and was extremely professional and efficient at managing the whole process.”

Read the full case study here

Benefits for the business

The culture of the business is maintained

Unlike a trade sale where a third party will control the business

Long-term succession planning is enhanced

Employee progression into senior management roles can be planned over the longer-term

Management & employees incentivised

Because they’re co-owners, staff tend to be more driven to succeed.

Easier to recruit good staff

Candidates like companies where they feel they matter and are rewarded appropriately

Improved staff retention

Having a stake in the business improves staff loyalty

Annual tax-free bonuses - up to £3,600

Employees can receive tax-free bonuses from the profits of employee-owned businesses

High levels of employee engagement

Led by collaborative managers who consult and share, employees want to co-operate..

Improved productivity

Employees are more driven working in an environment where they see the benefits.

Business outperformance

The Employee Owned sector has enjoyed faster growth and more stability.

Selling to an Employee Ownership Trust (EOT) - How it Works

The owners of the business sell their shares (at least 50.1%) in the company to a trust (the EOT) at a fair value – determined by an independent valuation. The purchase price is paid by the EOT over time (typically 2-7 years) from the after-tax profits of the company, effectively an ‘earn-out’ structure. The EOT becomes the owner of the company and is administered by trustees on behalf of the employees. The trustees typically include the previous business owners, an independent chairman plus employee representatives.

Employee Ownership is proving a highly successful business model. It builds on the existing strengths of the business and people that helped build it and work within it. The business owners realise a fair price whilst ensuring the business continues to grow and prosper for the sake of employees and clients. The business owners can plan to phase out their involvement to suit personal circumstances, remaining involved for a time and in a capacity that makes sense for all involved.

What are the qualifying Conditions?

  • You must be selling shares in a trading company or the parent company of a trading group
  • The company must have sufficient employees who are not shareholders or connected persons
  • The EOT must acquire a controlling interest in the company
  • The EOT must be established for the benefit of all employees

For more information on how an EOT transaction works, see “Frequently Asked Questions”.

Contact RVE today to discuss your EO business strategy.
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Case Studies

Renaissance International Leadership Limited

Image Creation Limited

FAQs

1. What is an employee ownership trust (EOT)?

An EOT is a form of indirect employee share ownership where a controlling interest in the business is held by the EOT for the benefit of all employees.

EOTs were introduced in 2014 by the coalition government to promote wider share ownership and more diverse ways of running a business that could create long term sustainable growth. The incentive for owners to sell to EOTs are the very generous tax breaks offered.

An EOT is run by trustees a majority of which must be independent of the owner(s). Trustees typically include the company’s directors, employees and external professionals.

2. What price does the EOT pay the owner and how is the consideration financed?

The owners get a full market price for the shares that are sold to the EOT. The purchase consideration typically comprises a cash payment at completion (paid out of surplus cash in the business) together with loan notes which the EOT repays over an earnout period (typically 5 years in length) using cash generated by the business. Additional loan notes repayable after the earnout period may also form part of the overall consideration.

3. What are the tax benefits of selling to an EOT?

The incentive for owners to sell to EOTs include very generous tax breaks. Provided the owners sell a controlling stake (more than 50% of the company’s shares) to the EOT they can do so without incurring any capital gains tax liability.

In addition, the company controlled by the EOT can pay tax-free cash bonuses to employees of up £3,600 per employee per year.

4. What businesses are suitable for an EOT transaction?

The business needs to be a trading company (as opposed to an investment company) and have a minimum level of employees who are not the owners or connected persons (e.g. spouses). The owners must also be able to sell a controlling stake (more than 50% of the company’s shares) to the EOT.

The EOT route is particularly attractive for professional service businesses and for small and medium sized companies generally (those with a value of £0.5m to £30m). It is also attractive to large companies that fail to generate trade buyer interest.

Because the EOT model is self-financing (no external finance is required) the business needs to have a certain level of financial resilience to make it suitable for an EOT transaction. The business should have no external debt (or only minor external debt) and its trading outlook should be profitable and cash generative. Having surplus cash in the business is a positive benefit as it can be used to part fund the overall consideration payable to the owners.

5. How does a sale to an EOT work?

Selling to an EOT is effectively an “in-house” transaction controlled by the owners and negotiated with the company and the EOT, which the company establishes.

The business is independently valued to ensure the trustees of the EOT can be satisfied they are paying a fair market value. This valuation sets the sale price to be paid to the owners which the EOT settles in cash (using any surplus cash in the business) and by issuing loan notes to the owners. The loan notes are scheduled for repayment by the EOT over the earnout period, subject to the EOT receiving funding from the company. During the earnout period or until the loan notes are fully repaid the rights of the EOT are restricted and the owners will continue to retain an element of control of the business.

6. Who runs the business after it is sold to the EOT?

The company’s directors continue to run the business following a sale to the EOT.

The EOT has a supervisory role with the right to remove directors acting counter to the EOT’s interests. In principle the EOT can also sell the business.

During the earnout period or until the loan notes are fully repaid the rights of the EOT are restricted and the owners will continue to retain an element of control of the business.

7. Can the owners continue to work in the business?

Yes, the owners can continue to work in the business, and this does not affect their ability to sell their shares free of capital gains tax.

8. As well as tax advantages what other advantages are there to selling to an EOT?

Selling to an EOT has several major advantages for the owners.

The biggest advantage for the owners can simply be the ability to sell the business at a full market price which otherwise would not be possible via any other exit route or would otherwise be unattractive (for instance due to the impact the sale would have on staff or the culture of the business) or too high risk (for instance due to how an earnout might operate or the risk of sharing sensitive information with a competitor).

Other key advantages include control of the sale process and earnout, low deal risks, low costs, flexibility in structuring the transaction and not having to raise external finance.

9. How do the business and staff benefit from an EOT transaction?

Selling to an EOT has a number of major advantages for the business and staff.

Key advantages include the culture of the business being maintained, long term succession planning being possible and management and staff being clearly incentivized (including tax free bonuses of currently up to £3,600 per person per year). All this should help the business retain and recruit good staff, improve employee engagement which together can improve productivity and generate business outperformance.

10. How long does it take to do an EOT transaction?

Selling to an EOT can be a relatively quick process typically taking less than 6 months to complete once a decision has been taken by the owners to proceed. This is because the key steps in an EOT transaction are relatively straightforward and the negotiations are very much “in-house” involving the owners, the company and the EOT.

With an EOT transaction there are no long delays in identifying buyers, preparing information memoranda, waiting for debt and equity finance to be arranged and negotiating with potential buyers over price, disclosures and onerous warranties.

11. What are the costs of an EOT transaction?

Deal costs for an EOT transaction are typically much lower than with a traditional trade sale or management buyout and are fixed (i.e. they don’t vary dependent on the sale price achieved).

Deal costs for a typical EOT transaction can be 1% on a £5 million deal whereas deal costs using other exit routes can easily be over 5% and sometimes over 10%. As with all share sales, stamp duty is paid at 0.5% of the sales price and is borne by the acquiror (the EOT in an EOT transaction).

In addition, the cost of testing the feasibility of an EOT transaction is likely to be much lower than the equivalent cost with other exit routes.

12. What are the deal risks with an EOT transaction?

Deal risks on an EOT transaction are much lower than on other exit routes because there is a clear buyer (the EOT), the price is set by an independent valuation, there is no requirement for external financing and because negotiations are “in-house” involving just the owners, the company and the EOT.

The key deal risks for an EOT transaction are the owners changing their mind over whether to sell and unforeseen changes in the trading outlook for the business.

About RVE

RVE is a corporate finance advisory firm which focuses on advising owners of small and medium sized companies (“SMEs”) on the sale of their business.

What makes RVE different is that it specialises in advising on and structuring employee buyouts, where the owners sell the business to a newly formed employee ownership trust (“EOT”). RVE has considerable experience of EOT transactions and with RVE’s in-house legal capabilities it can provide clients with a full-service advisory team from inception to completion of any EOT transaction.

RVE was founded in response to the growing number of EOT transactions and the need for specialist advice. RVE expects this growth in transactions to continue as business owners become better aware of the significant tax and commercial advantages that an EOT transaction offers, as well as the benefits and incentives that becoming employee-owned bring to the business and its employees.

The team at RVE includes experienced chartered accountants and corporate finance advisers who have previously worked together at PwC Corporate Finance.

When RVE is appointed it works with the business owners to understand the business and their goals and helps determine the most suitable exit route. If the most suitable route is not an EOT transaction then RVE has the experience to advise the business owners on alternatives, whether for example a trade sale, private equity funded management buyout or vendor funded management buyout.

RVE is a member of the Employee Ownership Association.

The Team

CONTACT

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If you would like further information on RVE, how we operate and work together with our clients, contact us via phone or email or submit an enquiry on the form below.

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