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Employee Ownership Trusts – A Viable Option for Your Family Business?

on Wednesday, 24 July 2019.

No obvious relatives to pass your family business on to? Loyal employees may be your answer through an Employee Ownership Trust.

Whilst passing your family business onto the next generation may be the preferred route, for one reason or another, this may not be an option for many family business owners. So, do you look to exit through a sale to a third party? Possibly. But again this might not be appropriate for a number of reasons.

One increasingly popular approach is the Employee Ownership Trust ("EOT"). EOTs were introduced by the Government to encourage employee ownership of business.

A recent example of use of an EOT has been the sale by Julian Richer of a 60% stake in his home entertainment retail business, Richer Sounds, to his staff.

What is an Employee Ownership Trust?

An EOT is a trust established for the benefit of all the employees of a business and which meets certain requirements. For example:

  • The company must be trading.
  • The EOT must control the company.
  • The EOT must be established for the benefit of all employees.
  • All employees must receive equal benefits from the EOT.

The trustees, as shareholders, will have a certain degree of control of the business and will need to conduct themselves in the best interest of the employees. The operational management of the business will usually remain with current management team although the trustee of the EOT may require an employee representative on the board.

Benefits

The key tax incentives for you as the current shareholder of your family business is that you should not realise a capital gains tax or inheritance tax liability on the sale of your shares to the EOT. There are also other benefits to selling your family business to an EOT.

  • Employees can receive tax free bonus payments of up to £3,600 each tax year.
  • A sale to an EOT can take place over time and at a pace that suits the selling shareholder(s).
  • Disruption can be minimised, as generally there are no significant changes in management personnel.
  • The company remains independent from third party influence i.e. people who have not worked in your family business and may not share the same values as your family business.
  • Unlike in a traditional business sale, the Sellers  are not usually required to provide extensive warranties and indemnities to the EOT.


Finance

The EOT trustee will usually require finance to acquire the shares in the company. This finance can be sourced either from lenders, vendor finance (leaving some of the consideration outstanding with a loan note to back it) or a combination. We are happy to put you in touch with advisers who can assist with obtaining this finance.


Is an EOT right for your family business?

Using an EOT as part of your succession plan is one option to be considered amongst several. Factors to be considered are the finance options available, the return to the selling shareholders and issues of business succession. It is likely to be most attractive to selling shareholders who are looking to pass ownership on to their employees or who are struggling to find a trade purchaser. Given the tax benefits, EOTs should certainly be considered as a viable alternative to a more traditional trade sale.


To find out more information, please contact David Emanuel on 020 7665 0848, Emma Bradley on or 0117 314 5445 or Shimon Shaw on
01923 919 352, or complete the form below.

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