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Employee Ownership Trusts: Viable ownership structures?

Posted on 6 April 2022

Since the COVID-19 pandemic, there has been a cultural shift towards employees influencing the successful growth of businesses.

In light of this, the use of Employee Ownership Trusts (EOTs) has increased significantly in the last 18 months. Examples include Richer Sounds, John Lewis, and more recently the recruitment company, SSQ.

Research has shown that keeping the business "in the family" can generate higher productivity, lower workforce turnover, better recruits and more resilience to economic change.

What is an EOT?

An EOT is a special form of employee trust introduced by the Government in 2014. With the objective of encouraging wider employee ownership, an EOT offers some generous tax benefits.

If certain legislative requirements are met, existing shareholders can sell their shares to the EOT without incurring any capital gains tax. In addition, once set up, an EOT-owned business can pay annual bonuses to employees free of income tax of up to £3,600 per tax year.

An EOT must own more than 50% of the company's shares, and any distributions made from the EOT must be made to employees on broadly the same terms and conditions.

To enable future incentivisation, many EOT companies establish employee share plans to run alongside the EOT structure, such as share options and share purchase arrangements.

As the majority owner of the business, the composition of the board of trustees and overall governance structure must be carefully considered. The trustees typically comprise directors of the company, alongside an employee representative and an independent director (such as a professional adviser). A trust deed would set out what the trust can / cannot do with the shares, and how distributions are made.

Is an EOT a viable alternative to a trade sale?

EOTs are commonly used as a succession planning tool by founding shareholders in businesses across multiple sectors, especially those where people are their greatest asset.

Funding an EOT to acquire the business must be carefully structured, and often requires selling shareholders to be paid-out over an extended period of time. This can align with the aims of the selling shareholders wishing to retain influence during a transitional period.

A sale to an EOT has the advantages of having an immediate purchaser buying at full market value, which can be completed more quickly with lower fees.

An EOT can therefore indeed be used as an alternative to a trade sale, where given due care and planning.

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