When the time comes to exit your business, an Employee Ownership Trust (EOT) could be a great way to continue its legacy and growth with an executive team you trust calling the shots.
An EOT is a trust that holds a controlling stake in a company on behalf of all its employees. After buying a business, the EOT is run by trustees who must make decisions in the best interest of the business’ employees.
WHAT ARE THE MAIN BENEFITS OF EOTs?
- EOTs allow owners to sell a controlling stake (>50%) of their business without paying any Capital Gains Tax (CGT), and businesses owned by EOTs can pay tax-free bonuses of £3,600 per employee each year.
- The board of trustees is separate to the company’s board of directors. So, the day-to-day running of the business doesn’t have to change, meaning EOTs are a good exit strategy if you don’t want to go out to market or get private equity involved.
- With an EOT, your business’s legacy and reputation in its market are safeguarded. What’s more, if you don’t feel anyone is ready to lead the business, you can retain your executive role and sell your controlling stake, giving you time to coach the next generation before a potential management change in the future.
EOTs: THINGS TO CONSIDER
- An EOT needs to be tailored carefully to your business because there are plenty of design choices to be made. These include how many shares are going to be sold, how those shares are going to be funded, whether you will establish an employee council to decide what recommendations are made to the trust, and much more.
- Making sure your management team are bought into an EOT is hugely important, because they’ll be taking the business forward. While an EOT benefits all employees, second-tier management may have envisaged owning the business and selling it themselves one day, meaning an EOT could be seen as a step back regarding the reward they receive. Early, transparent communication is key here.
- EOTs aren’t a one-size-fits-all exit strategy. If yours isn’t built for purpose from the off, you can cause yourself more commercial headaches than you have saved tax.
IS AN EOT THE BEST OPTION FOR YOU?
At Cooper Parry, we’ve supported a long list of owners who’ve switched ownership of their business to an EOT structure. We’ll help you understand whether it’s the best option for your exit, and if it is, we’ll facilitate the whole process and be on hand to answer any questions you may have throughout the journey.
If you want to chat through your options, get in touch.
