On Wednesday 7 July, we hosted a webinar in collaboration with Brabners, detailing everything you need to know about selling to an Employee Ownership Trust (EOT).
Our session, hosted by Peter Kelly (PM+M) and Brabners, welcomed panellists Stephen Hadlow (Brabners), Nicola Whittle (Brabners), Jonathan Cunningham (PM+M), Yogita Johnston (Employee Ownership Association) and Mike Gardner (Claremont Group Interiors) to guide discussions around EOT transactions as a succession solution, untapped succession opportunities for EO in the Lancashire SME market, the size and growth of the EOT sector, tax implications and what an EOT looks like in practice.
Stephen Hadlow (Brabners) opened up discussions by detailing the Nuttall Review of employee ownership by the coalition government in 2014, explaining that following this, the introduction of the EOT structure has given a massive boost to the sector, with many relating this model to John Lewis. However, Stephen mentioned that the EOT structure can be utilised by businesses of all shapes and sizes, from SMEs to large companies, with discussions then focusing on the general principles behind employee ownership and how an EOT works within a business.
Yogita Johnston (EOA) then followed this up with some fantastic figures, highlighting the massive growth of EOTs in the past couple of years. Yogita explained that there are currently 730 employee owned (EO) businesses in the UK, with 148 registered in 2020 alone (a record number). In the first six months of 2021, there have been a further 113 EO businesses registered – an example of the huge increase in the volume of businesses choosing a succession solution which goes beyond just selling the business. Yogita outlined recent research which also suggests that EO-owned businesses place more of an emphasis on job retention, inclusivity, and sustainability, as well as improved communication and engagement between employees. Yogita explained that it is proven that giving employees a voice and responsibility helps to drive businesses forward and ultimately improve profitability.
Stephen Hadlow (Brabners) went on to describe why shareholder and management teams find the EOT structure so appealing. Selling to an EOT is a long-term succession solution which provides a stable future for the firm, whilst protecting the culture and legacy of the business, as well employees interest – something which may be lost when selling to trade.
Stephen also explained that selling to an EOT also removes the need for extensive due diligence and possible fraught negotiations with third party buyers – hence the entire sale process is likely to be quicker and more efficient.
Jonathan Cunningham (PM+M) detailed the excellent tax advantages which are available when selling to an EOT – such a sale can be made without attracting any charge to capital gains tax and can provide the opportunity for employees to receive income via tax-free bonuses each year.
However, Jonathan explained that there are certain conditions which must be met in order for the tax relief to apply:
- The seller must be an individual or trust, not a company;
- The shares must be ordinary shares, not preference shares;
- The company must be a trading company;
- The trust must acquire a controlling interest in the company (which it did not previously possess); and
- After the sale, at least 60% of employees must hold less than 5% of any class of share
Further details of the tax aspects of an EOT can be found in our recent blog here.
Mike Gardner (Claremont Group Interiors), one of our guest panellists, described his experience first-hand of selling his business to an EOT, after having previous experience with venture capitalists and considering an MBO. Mike explained that the business chose the EOT option as it met requirements in terms of protecting the culture of the business, offering tax advantages as well as the speed of the transaction overall – the decision was made to sell to an EOT in August and the deal was completed in November.
One of Mike’s biggest worries when considering his succession planning was protecting his employees’ interests – the EOT alleviated these worries and ensured nothing would change.
Mike described how Claremont are outperforming on every level since the EOT went through eight months ago and has noticed an increase in employee motivation and engagement.
In terms of misconceptions and worries that individuals may have when considering selling to an EOT, Nicola Whittle (Brabners) explained how running the business doesn’t have to change – there will still be a board of directors who are responsible for the day-to-day running of the business. Although the EOT will have a majority stake, employees do not directly run the business after the sale – there should be no changes to how the company was run before the sale to the EOT.
It is also a misconception that EOTs are for large businesses, but the panel emphasised that EOTs are suitable for any profitable business considering succession planning, especially family-run businesses.
GET IN TOUCH
The significant advantages of a sale of an EOT could provide a welcome solution for anyone looking to exit a business as well as those who want to transfer ownership to the workforce for philanthropic reasons. The corporate finance team at PM+M can talk you through all aspects of the process, including introductions to potential funders to finance the purchase and working closely with our in-house tax specialists to ensure all areas are covered. Get in touch at email@example.com.