EMPLOYEE OWNERSHIP TRUST (EOT)

EOT is a new type of ownership where the employees of a company have a significant stake in the business. This means that the employees have a financial stake in the business (they own shares) and they collectively have a say in how the business is run. This was created to encourage companies to be employee owned.

The important issue for a business owner who sells to an EOT owned business is the two tax breaks this concept allows:

• The owner selling its shares to the EOT may do so free of Capital Gains Tax
• The employees may receive annual bonuses free of income tax.

A condition for the EOT to work with the tax breaks must have a minimum of 51% of shares allocated to the employees

HOW IS THE EOT MANAGED?

The EOT is run by the trustees who are in turn the employees of the company. They will not be managing the business that is done by a management team which is a selected few and they are also members of the trustee and employees. This is done to ensure the company is being managed and led properly. This is at times managed by an employee’s council which may be put in place for assistance.

DISADVANTAGES OF AN EOT TRUST

One of the main disadvantages of an Employee Ownership Trust is that it is not an easy process and can be difficult to set up. You need to find a trustee who is willing and able to take responsibility of running the trust. You will need to transfer the shares to the trust which is a time consuming and complex.

BENEFITS TO THE SELLER

The EOT to sell your shares as the transaction is totally tax free with no capital gains tax thus making this very attractive to the seller.

An independent assessment is done on the business thus giving the seller a guaranteed full market value for the business, unlike a trade sale you will be guaranteed of a clear exit in a clearly stipulated time frame, this means there is no delays from a trade buyer.

This means that when you exit the business you are guaranteed that your staff will be well looked after, continuing your legacy.

A shareholder that wants to sell into the EOT but does not want to depart fully or immediately, succession can be implemented so you can retain a level of involvement to ensure the transaction may go through without a hitch.

EOT BENEFITS TO THE EMPLOYEES

I believe that the best received benefit for the employees (Trustees) is the trust can pay out annual bonuses tax free (there is a limit on the annual pay-out per trustee).

An EOT employees/trustees will have a say on the running of the business once the previous owner(s) have been paid out for their shares. This is beneficial to the business as I believe the employees/trustees will be rewarded for their hard work and assisting the business to grow.

WHAT ARE THE EOT BENEFITS FOR THE BUSINESS?

There are several benefits for the company over and above the benefits already shared for the exiting shareholder and employees.

Employee Ownership Trust businesses seem to be more:

• Resilient
• Profitable
• Sustainable

The employees seem to be a lot more motivated due to the incentives offered whilst the standard and performance of work seems to be a lot higher, employees seem to be a lot more committed to the long-term goal and vision of the company.

The benefits that the EOT brings to the existing owners, future owners and to the company makes this a very popular model of restructuring a business.

The EOT business model seems to be gaining momentum and been well received by the current shareholders, the employees now have an interest in the business and are more motivated. All round this seems the way of the future in selling a business.