Employee Ownership Trusts
Do you want to exit or realise a meaningful part of your share of your business… without leaving your colleagues in the lurch?
Are you anxious to avoid your business being dramatically changed by a private equity or competitor purchase?
Don’t want to see what you have built substantially depleted by the personal tax consequences of selling?
There is an alternative that can provide a totally CGT free exit for shareholders. With no upper limit on the amount of tax relief available.
Building a business is tough. A meaningful exit can be elusive for some. Where founders receive what they have spent years hoping they will achieve on a sale.
Trade sales and private equity backed deals can pose significant risks – to the business, to staff and to clients or customers. Or may simply not be viable.
There is an alternative. One where you can exit at market value and CGT free. AND you can retain significant influence as a manager over the business post deal (if you want to).
An exit or partial exit to an Employee Ownership Trust (“EOT”) allows you to exit and leave your business in safe hands.
So, what is an EOT?
An EOT is a trust that enables a company to become owned or majority owned by its employees. It can be set up by a company’s existing owners as part of their exit or succession planning strategy.
Benefits over a sale to a third party:
• Those selling their shares may do so free of capital gains tax.
• The sale can include anti-embarrassment provisions, if the EOT were to sell the business on at a big profit in the future. Passing some of the uplift to the exiting founders.
• It gives employees a substantial stake in the business. But because the shares are held in trust, it’s not one that they can immediately realise. Or, indeed, to use to exercise significant control.
• Once a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax.
Conditions:
There are two main conditions to enable the tax breaks:
• The EOT trust must hold more than 50% of the shares in the company.
• An independently determined price for the shares the EOT trust buys must be agreed. This can equal but must not exceed the company’s market value.
Fun Facts:
• All current employees must benefit from the trust. Although their share can be based on e.g. salary level or length of service.
• Payment for EOT shares bought from the founders is usually made in instalments from the company’s profits.
• Any surplus cash in the company at close can fund part of the initial payment to the founders.
• It may be possible to arrange an external loan for the purchase. This will enable the purchase price (or a larger part of it) to be paid in one go. That loan can be to the EOT or to the company.
• The EOT trustee(s) will NOT manage the company (this continues to be the role of the management team). But they should ensure the company is being well led to ensure employee engagement and commitment.
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