Could an Employee Ownership Trust be a good exit opportunity for you?

First introduced in the Finance Act 2014, an Employee Ownership Trust (EOT) is a business structure which enables companies to become owned by its employees. And they are growing in popularity.

In fact, as of June 2023, the Employee Ownership Association reports that there were 1,418 EOTs in Britain, a 37% increase on the number recorded the previous year.

As such, they are also becoming an option for some owners of advice businesses looking to exit.

Selling your business to an EOT has a number of benefits. Read on to learn what they are, and what kind of businesses they are better suited to.

An Employee Ownership Trust allows your team to take over the business

An EOT is a form of indirect business ownership where the shares are owned by a trust fund for the benefit of the employees.

Using an independent assessment, a price is agreed upon. Based on that price, the business owner sells a controlling stake (51% or more) in the company to the EOT.

Normally, the business owner does not receive an immediate payout for the business; instead, the payment will be made in instalments from the EOT’s future profits. It is sometimes possible to arrange an external loan to enable the purchase price to be paid in one go.

After the sale is completed, an EOT is run by its trustees to maximise employee engagement and commitment. The management team remains responsible for the day-to-day running of the business.

Employee Ownership Trusts offer a number of benefits for you, your employees, and your clients

There are quite a few potential positives to selling your business to an EOT.

For you as a business owner, the benefits include:

• Full Capital Gains Tax relief
• You can retain some ownership of the business
• Selling to an EOT can be quicker than selling to a third-party buyer
• You can ensure your business continues after your departure.

Your employees can also gain if you decide to form an EOT. Their benefits include:

• Preserved business culture
• Improved employee morale and retention
• Improved employee engagement and innovation
• Employees can receive up to £3,600 in tax-free bonuses every year.

Of course, where there are upsides, there are also potential downsides:

• Normally there is no immediate cash payout for the owner, and their dividends shrink.
• Future profits can reduce significantly to meet the owner’s payouts, hampering growth plans.
• Owners can find it difficult to no longer be in control.
• Some more unscrupulous owners may seek to offload a poor, or even, toxic business onto unsuspecting staff.
• Staff may be thrust into roles they didn’t sign up to or don’t have the experience for, distracting them from the day job. Additional training may be required.
• You may well receive a lower price than you would have with a third-party buyer.

Whether an Employee Ownership Trust is right for you depends on your business

Despite the potential benefits of an EOT, they aren’t the best option for every business and owner. Typically, an EOT may suit:

• Business owners who feel their legacy is critical
• Businesses with strong management structures already in place
• Businesses of a certain size that can continue without you as the owner.

Get in touch

If you are considering an EOT as a potential exit strategy, we can help you decide if it’s the best option for you. To find out how we can help you, email hello@melo.co.uk or call 0113 4656 111.