A growing trend for those seeking to exit their businesses, rather than sell to a competitor they have battled for years, is to sell it to those who have helped it become a business worth selling – the employees. Richard Cowley, EOT Director at RM2 Employee Ownership, reports.

 

For owners looking to exit their business, an Employee Ownership Trust (EOT) enables them to transition ownership to their colleagues, recognising it will continue to flourish in the hands of experienced and motivated employees.

The owners must sell a controlling stake in the business to their employees, but by retaining up to 49% of the share capital they can remain involved, which makes a smooth exit more likely given the lack of change in senior roles – the selling owners can remain as directors.

The sale to an EOT is usually paid for by the business out of reserves and future profits, which means the selling owners effectively lend the trust the money to buy the company. The loan repayment period is typically five to six years. As the exiting owners near their eventual exit with the loan almost repaid, the transition to a new management structure can be undertaken at a pace that suits the owner(s), the business, and the employees.

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 relatively straightforward and avoids the need to find a buyer, avoids complex negotiations, and there is no need for extensive due diligence.
• Selling to an EOT can help protect the business and its employees, with the exiting owners keen for the business to thrive and grow.
• Selling to an EOT not only offers a highly effective way to reward existing employees and keep them engaged but can also help attract and retain talent.

What are the 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. Also, each employee can receive a bonus of up to £3,600 per year tax-free.
• An EOT can help the company stay independent, with less likelihood of unsettling employees who may have concerns over building a relationship with a new boss and changes to working practices and the company’s culture.

What are the advantages for the business of selling to an EOT?

• Transferring to an EOT can allow for a carefully planned and managed transition, which ensures the business continues to run effectively during the transition process.
• Typically, the selling owners stay with the business during the transition, ensuring the business continues to benefit from their experience and expertise.
• Giving employees a stake in the future of the business can significantly boost their sense of connection to the business, improving engagement, productivity and loyalty. When considering selling your business to an EOT, these benefits must be clearly and regularly communicated to the entire business to ensure a smooth transition.

Key considerations when selling to an EOT

Transitioning a business to employee ownership is not the right exit strategy for everyone, but remains an easier alternative to finding and assessing the suitability of a third-party buyer. Key considerations include:

• The company must pay for itself, so valuations are limited by what the company can expect to earn over the next five to 10 years.
• The current owners/directors remain responsible for succession planning, so planning for the medium and long term is critical, not just in the run-up to the EOT transaction.
• The EOT transaction process can be completed within three months of contacting an adviser, but the owners can slow the process to suit.
• Colleagues face no financial risk.

Timescales and planning your exit

By selling their shares to an EOT, owners can create a tax-free exit from their business whilst remaining in control of the process. They do not need to deal with a third-party buyer and the usual complex, time-consuming, and expensive sales process that entails.

EOT transfers are amongst the quickest and easiest business sales possible, driven by having the seller and buyer on the same side, working towards the same outcome.

Transitioning ownership of a thriving business to colleagues who helped build the company, without them facing personal financial risk, typically delivers the long-term benefits that make EOT a genuine win-win for owners and colleagues alike.