In the Finance Act 2014, Employee Ownership Trusts (EOTs) were launched. The EOT provides employees a direct stake in their futures and can lead to increased productivity and creativity at work.. Employees who work in a positive, collaborative environment are more engaged and committed. If the firm is sold in the future, qualifying employees will share in the sale proceeds.
Many businesses, both large and tiny, have benefitted from selling to an Employee Ownership Trust. Our knowledgeable staff has worked with restaurants, factories, and electrical contractors, among other industries. A growing number of company owners are considering the advantages of establishing an Employee Ownership Trust in the areas of fashion and music, as well as healthcare and publishing companies.
This popular business structure has advantages for both the company owner and the employee. These benefits include no tax for the vendor and a sense of inclusion for the employee.
The trustees of the EOT must come to an agreement on the price of the company. A professional share valuation may be required.
Because there is no tax to pay for the vendor, EOT’s are extremely tax efficient.
It could usually result in one of two things:
It’s critical to have a professional assessment when creating the trust and transferring ownership.
It must have the valuation from an independent expert that defends the price and the EOT trustees have trust in. The valuers’ aim is not to provide a range of values based on particular conditions or circumstances; instead, they must agree on a valuation that they believe reflects true market value and may be used by the trustees and justified before HMRC.
If the valuation is too high, HMRC may consider that the EOT has paid an excessive amount for a company. The extra amount will be taxed as income tax rates. While the valuation of the company should be comparable to that of a trade sale, in most cases, it’s normal that the payment terms for the consideration by an EOT will be over a much longer period, than would be normal from a trade sale.
It is worth noting the following if you are considering whether an Employee Ownership Trust is appropriate for your company:
All employees can be beneficiaries of the trust, subject to a few restrictions set forth by the EOT legislation, which are:
While the rules surrounding structuring an EOT are tight, MBO rules are more flexible, thus making it possible for the two to work together to create a planned retirement plan for current owners.
The existing management team might buy a 10%, 20% or even 30% interest in the company. With the option to purchase more shares over time up to a maximum of 49%, and have 51% equity ownership in the hands of employees with an EOT. Given their position, the existing management team is likely to be trustees and beneficiaries of the EOT (unless their personal stake in the MBO exceeds 5% of total equity), demonstrating their support for the handover of control that is necessary as part of an MBO.
By taking the technique outlined above, transferring ownership should minimize the upheaval that a sales transaction would typically cause for a business. The current owners will gradually hand overall control and management of the company to the incumbents. If the EOT is already in place and the present management team acts as trustees, little will change in terms of the Board’s structure. Even if there isn’t a pre-existing EOT, there’s no reason they can’t be set up in parallel to minimize business disruption than a more conventional private equity-backed MBO. From a workplace culture standpoint, the two being set up together may have a beneficial influence on the company’s entire workforce since they will be involved in the business’s total sale and feel connected to the company’s next stage. It is possible for the vendors to complete a change of ownership as outlined above, but they must take care to structure it carefully and that any consideration paid to them, especially with delayed payment, is solely that and not employment-related pay. It’s also worth noting that the management team members who sold shares as part of the MBO would profit from share buybacks at the time of exit in the future. The second worry is that, while EOTs introduce employee ownership in a business and not individuals, the profits on their investments are only realized by those in the company at the time of exit (beyond the tax-free, annual bonus that employees may receive). For those persons who have little or no prior understanding of company ownership and capital value growth, this may perplex; the technique is intended to encourage loyalty and extended service in the firm.
The company may also need to get a double tax clearance, as both an EOT and an MBO necessitate the filing of an application with HMRC.