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9 September 2019

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Using an Employee Ownership Trust to Sell Your Business

Posted by: Akbar Ali

If you’ve spent years nurturing the growth of your business, you might consider your future moves for it — including selling on.

How you choose to sell your business will greatly impact how much money you receive and how easy the process will be. For that reason, the structure of the sale and who you sell to should be thought about carefully.

While you may assume that to sell a business you just need to find a buyer and sign on the dotted line, there are actually many options to choose from, one of which is selling to an Employee Ownership Trust (EOT).

EOTs are growing in popularity, but what makes them such an effective solution for business owners who want to sell?

What is an Employee Ownership Trust?

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An EOT is an indirect form of employee ownership that was introduced in the Finance Act 2014 and popularised by John Lewis.

Unlike the traditional business ownership model, an EOT is designed to put more companies in the hands of their employees. So, rather than being owned by shareholders, the business is majority-owned by the trust and managed by trustees on behalf of employees.

Advantages of Using an Employee Ownership Trust

To encourage more businesses to adhere to an EOT model, the Government introduced a host of benefits for both owners and employees.

Owner Benefits

Capital Gains Tax Exemptions

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By far the most beneficial part of selling to an EOT is the fact that shareholders get to enjoy full capital gains tax (CGT) relief. This means you won’t pay any tax on the gains you make from the disposal of your shares, allowing you to release the full value of your business shares.

If you were to sell through more conventional means, the best you could hope for is 10% CGT and that’s with entrepreneur relief. So, it’s easy to see how selling to an EOT can save thousands, if not millions, in CGT.

Simple Succession Planning

For owners who aren’t sure who should take over from them, EOTs provide a simple solution and a ready-made buyer. This is particularly useful for family-run businesses, where there may not be someone with the right skill set available to take over.

Rather than having to go through the time, effort and expense of selling to someone you don’t know, EOTs allow you to leave your business in the hands of your employees.

Full Market Value on Shares

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When selling your business to a conventional buyer, it’s wise to expect some extended negotiations. After all, you both want the best price. If you want a quick sale, that could mean you’ll need to give some ground and accept a price at slightly below market value.

When selling to an EOT, you don’t have that problem. Instead, you and the EOT will agree to a fair market value using an independent professional, and that’s the price your business will be sold at. 

Not All Shareholders Have to Sell

If your business has multiple shareholders, you may be worried that some won’t want to sell to an EOT. This shouldn’t be a point of contention, though, as an EOT only requires 51% of the shares to be put into motion.

Directors Can Remain

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It’s possible that you want to unlock the value of your business by selling but aren’t quite ready to step away. What’s great about an EOT is that Directors can remain at the company and still receive competitive remuneration packages.

This can allow you to transition out of the business at a pace that suits you, unlike selling to a new buyer who is likely to put their stamp on the company from day one.

Potentially Lower Costs

While nothing is guaranteed, it’s not unusual to expect to pay less in sales fees when using an EOT. After all, you won’t have to spend long finding a buyer and you shouldn’t have much trouble agreeing to a price.

Employee Benefits

Tax-Free Bonuses

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Everyone wants a reward for their hard work. With an EOT, employees can enjoy bonuses of up to £3,600 per employee per year. These payments are free from income tax, though, not exempt from national insurance contributions.

Increased Employee Representation

As part of a business being owned by an EOT, employees must have a say in how the business is run. This can be achieved in a number of ways, from setting up an employees’ council to having employee directors on the board.

How this engagement is achieved will depend on the business, but regardless, employees will be given a much greater voice in deciding how the business is run.

Improved Morale

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As a result of increased engagement and yearly bonuses, there is often a boost in employee morale when a business is owned by an EOT. This can manifest itself in many ways, from an improvement in the quality of work to a reduction in absences.

How to Sell Your Business Using an Employee Ownership Trust

If you’re convinced by the benefits of selling to an EOT, your next step is to explore the process of how you can go about selling your business.

The sales process varies from business to business, so you should always seek professional legal advice, but below is a rough overview of what you should expect.

Qualifying Criteria

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In order to sell to an EOT, you’ll need to meet five qualifying criteria. These are:

  1. The company whose shares will be transferred must be a trading company or principle company of a trading group.
  2. Trustees of the EOT must restrict the application of shares for the benefit of all eligible employees on the same terms.
  3. The trustees must retain a minimum of 51% of the controlling interest in the company at all times.
  4. The number of continuing shareholders who are directors or employees must not exceed more than 40% of the total number of employees.
  5. Trust property must be applied for the benefit of eligible employees on the same terms, although trustees can distinguish between employees on the basis of remuneration, length of service and hours worked.

Setting Up an EOT

An EOT will need to be established by the company and trustees appointed. However, in order to protect a trustee from personal liability, a private company limited by guarantee is typically used as a corporate trustee of the EOT.

Individuals can then be appointed to the board of the directors of the trustee company, allowing them to become trustee directors. These trustee directors can be anyone and are often made up of current employees.

Valuing the Shares

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As part of the sales process, the shareholders and trustee company will jointly engage a share valuation expert to determine their market value. This will then be used by the trustee company to determine the purchase price.

The trustee company will also need to organise financing for the purchase. While it is possible for 100% of the financing to be gathered, it is far more common for the EOT to only pay for a portion of the shares upfront and then have a debt to you that it pays off later.

This is one of the key considerations when choosing whether to sell to an EOT. While you usually enjoy a simpler sales process and a better price, you aren’t guaranteed to get the full value of your shares upfront.

Selling to an EOT

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At this point, it’s important to state again that no two sales are the same, so if you’re serious about selling to an EOT, you should seek legal advice specific to your case as soon as possible.

That said, there are some broad steps you’ll likely follow in your sale. These are:

  1. Heads of terms: While typically not legally binding, heads of terms allow all parties to negotiate any points of difference and document them prior to a sale and purchase agreement being drafted.
  2. Sale and purchase agreement (SPA): The SPA forms the main agreement between the seller and trustee company and documents the terms on which the sale of the shares will occur.
  3. Disclosure letter: In the event that any trading warranties are given by the seller, the disclosure letter gives the seller the chance to disclose any relevant information against the warranties.

Repayment of Debt

Occasionally, the sale of your business to the trustee company creates a debt owed to you. This will be repaid through the profits generated by the company.

Therefore, when selling to an EOT, you need to be confident that the business will generate enough profits to pay you the remaining value of your shares.

Want to Learn More?

Selling to an employee ownership trust is a great solution for many business owners wanting to unlock the value held in their shares.

To find out if it’s right for you and your business, get in touch with the corporate team at Glaisyers to learn more.

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Akbar is head of our Corporate department. He has experience in transactional mergers and acquisitions, advising clients from owner managed and SMEs to large corporates, and has the ability to provide expert advice and oversight in complex negotiations.

Akbar Ali - Head of Corporate, Operations

To discuss how Glaisyers can assist you contact Akbar Ali on Akbar.Ali@glaisyers.com or via 0161 832 4666.

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