Some small business owners are using Employee Ownership Trusts (EOT), allowing them to manage their exit. Richard Cowley explains.

An Employee Ownership Trust (EOT) enables the owners of a business, to transition ownership to their colleagues, so they can manage their exit, safe in the knowledge the business will continue to flourish in the hands of the remaining experienced team.

The owners must sell a controlling stake to their employees, but by retaining up to 49% of the share capital they can remain involved, ensuring that with no significant change in senior management roles, a smooth exit is more likely.

The employees now own the business indirectly, with the trust owning the shares on their behalf, which offers significant tax and a range of other advantages for the selling owners.

The sale of shares to an EOT is paid for by the business out of reserves and future profits, which means the selling owners effectively lend the funds for the trust to buy the company. The repayment period is typically five to six years.

When the loan is close to being repaid and the owners decide a date for their exit, succession planning becomes key. But the transition to a new management structure can be completed to a timeline that suits everyone involved.

Advantages for the business owners of selling to an EOT
Selling the controlling stake in a business to an EOT is tax-free, with all sellers receiving 100% Capital Gains Tax (CGT) relief. Selling a business to a trust is also relatively straightforward. It avoids the need to find a buyer, any complex negotiations and little due diligence.

Selling to an EOT can protect the business and employees, as the exiting owners will undoubtedly want to leave a legacy, with the business able to thrive. The EOT route also rewards existing employees and keeps them engaged, whilst helping attract and retain the best talent.

Advantages of working for a business held in an EOT
Typically after the selling owners have been paid, colleagues can expect increased pay as an employee profit share can be introduced. Each employee can receive a bonus of up to £3,600 per year tax-free.

Concerns over building a relationship with a new boss can unsettle employees who might worry the culture will change, but selling to an EOT can help the company retain its independence and avoid the concerns associated with a sale to a third-party.

Advantages for the business of selling to an EOT
Transferring to an EOT can allow for a carefully planned and managed transition that ensures the business continues to run with little disruption during the process. Typically the selling owners remain throughout the transition, allowing the business to continue benefiting from their expertise and experience.

When employees have a genuine stake in the future of the business, it can significantly boost their connection to the business and its success. This is entirely understandable and typically leads to greater engagement, productivity, and loyalty throughout every level of the business.

As you plan your exit, if you are considering selling your business to an EOT, the benefits outlined above, must be clearly and regularly communicated to the entire business to ensure a smooth transition process that does not unsettle your people or your customers.

Key considerations when selling to an EOT
While exit strategies that involve transitioning a business to employee ownership are not right for every owner or every business, they are a sophisticated (and easier) alternative to the traditional corporate sale that requires you to find and assess the suitability of an appropriate buyer.
In addition to the benefits outlined above, your key considerations include:

• The company needs to pay for itself, which means valuations will be limited to what the company can earn over the next five-to-10 years.
• As the current owners/directors are responsible for succession planning, it’s important to plan for the medium and long term, not just up to the EOT transaction.
• The EOT transaction process can be quick. It can be completed within three months of you contacting a specialist advisor, but you can slow the process to suit your timeline.
• Selling to an EOT avoids any financial risk for your colleagues.
  
  While business owners can create a tax-free exit by selling their shares to an EOT, they remain in control of the timing of their exit. Also, they can focus on the business as they don’t have to deal with an external buyer and a difficult, time-consuming and expensive sales process.
  
  Having the seller and buyer on the same side, working towards the same outcome makes EOT transfers amongst the quickest and smoothest business sales possible.
  
  The transaction has little immediate impact on the business, but passing ownership to the people who helped build the company, without them facing personal financial risk, can deliver long-term benefits, making the EOT a genuine win-win for owners and colleagues alike.
  www.rm2.co.uk
  Richard Cowley leads RM2’s EOT advisory team