Employee Ownership Trust
An Employee Ownership Trust (EOT) is a model to encourage business owners to set up corporate structures in a different way (think John Lewis) with employees owning a share of the business.
Business owners looking to sell their business may choose to sell to an EOT for a faster and friendlier sale, to receive full market value for shares without long earn out periods and to help lock in, engage, and motivate employees who will be key to the ongoing success of the business.
There are generous tax breaks (currently a full UK capital gains tax exemption on the disposal) for shareholders who move to an employee owned model, but to qualify the ownership needs to be structured in a particular way.
• The company whose shares are transferred must be a trading company or the principal company of a trading group.
• The trustees of the EOT must restrict the application of any settled property for the benefit of all eligible employees on the same terms.
• Trustees must retain at least a 51% controlling interest in the company,
• The number of continuing shareholders who are directors or employees must not exceed 40% of the total number of employees of the company or group.
• Trust property must generally be applied for the benefit of all eligible employees on the same terms; however, the trustees can distinguish between employees on points such as remuneration, length of service and hours worked.
The sale of a business to an EOT works differently to usual business sales.
A qualifying EOT will be established with a corporate entity as the trustee of the EOT, the Trustee Company. Shareholders then sell their shares (a minimum of 51%) to the Trustee Company under a share purchase agreement. Once the business has been valued by the existing shareholders and the Trustee Company, this purchase price creates a ‘debt’ owned by the Trustee Company to the shareholders. The company continues to trade and trading profits are used to repay the outstanding purchase price.
This allows employees to buy the company without having to use their own funds. Not all shareholders have to sell their shares, and typically a controlling interest is sold to an EOT with some shares retained or sold at a later date.
Businesses owned by an EOT are more likely to have greater employee engagement and commitment, more innovation and better business performance and the reduction of issues such as absenteeism.
If you would like to exit your business and would like advice on the options available to you, get in touch.