The rise and rise of the Employee Ownership Trust (EOT)

The number of companies being sold from private ownership into the hands of their employees, via the use of Employee Ownership Trusts (EOTs), continues to increase.  

There has been much in the media over the past few years around the increasing popularity in the use of EOTs and there is no slowing in the rate at which sales to EOTs are happening.

According to the Employee Ownership Association, 1 in every 20 private company sales (as compared to trade sales and sales to private equity) was to an EOT, as at January 2021.

In fact, at the time of writing there are thought to be over 600 EOT owned businesses in existence in the UK, with HMRC data suggesting that many more are likely to follow.

The chart below shows how the number of EOTs has increased over the past 8 years – and the rate of increase shows no signs of letting up.

The EOT structure enables business owners to sell a controlling stake in their company to an EOT in exchange for the seller receiving full market value for their shares.

The EOT is operated by trustees, and the beneficiaries of the EOT are the employees of the company at any given time.

One of the key benefits for the seller is that, provided the relevant conditions are met, the proceeds that they receive for their shares upon a sale to an EOT can be received entirely tax free.

There are benefits for the employees too. The EOT structure enables employees to receive tax free bonuses each year of up to £3,600. In addition, research has shown that EOT owned businesses can be more productive and profitable as a result of increased employee engagement.

The tax rules mean that to obtain the tax free sale, the EOT must acquire a “controlling stake” in the business (i.e. more than 50%), however, the owner can still remain engaged with the business – in fact they can remain a full time employee and receive a commercial salary for their role whilst they remain employed.

A common EOT based exit strategy sees the owner receiving a share of their consideration on day 1, with the balance of the funds then taken over a period of time (known as “deferred consideration”).

This deferred consideration could be paid using the future profits of the trade (known as “vendor finance”), or by the EOT borrowing funds externally, for instance, from a bank.

Assuming there is some element of deferred consideration, the owner would have a vested interest to remain actively involved with the business following sale.

They will, of course, want to see that they receive their full consideration in a suitable timeframe. In addition, their presence can ensure that the stakeholders of the business, in particular the employees who will be responsible for running it, are well prepared to take it forward post-departure, as it may be the case that they do not come from a management role or they might not feel that they have the commercial experience required of a business owner at the point of sale.

Whilst the generous tax incentives remain, we anticipate to see continued increase in the popularity of EOTs, and data suggests that more and more EOT related clearance applications are landing on HMRC’s doormat each month. It will, of course, be interesting to see whether the increased attention that EOTs are receiving will result in HMRC looking to restrict some the generous tax reliefs that they currently offer.

EOTs are well suited to scenarios where there may not be a traditional exit route, such as a sale to a third party or a management buyout (MBO). This may become even more relevant in the coming months if the UK slips into a recession and a possible downturn in activity within the M&A market as is predicted by many. If you have questions you can get in touch using the button below.

A ROUNDUP OF OUR ‘NAVIGATING THE NOW AND NEXT’ EVENT – THURSDAY 24 FEBRUARY

The thirteenth in the series of PM+M’s ‘Navigating the Now and Next’ virtual panel events took place on Thursday 24 February, facilitating discussion between a panel of speakers on the ongoing challenges presented to businesses and taking a positive and forward-looking view on how to overcome them.

Hosted by our very own Neil Welsh, with digital hosting managed by our friends at The Landmark in Burnley, we welcomed panellists:

Dave Walker – Managing Director, +24 Marketing

James Robbins – Partner, Harrison Drury Solicitors

Amin Kamaluddin – Growth Consultant, SK Growth

Dave Scholes – Director, Six Connections

Following the opening introduction and welcome from Neil, Dave Walker highlighted some of the challenges he was facing within his business, +24 Marketing (a digital agency), including rising costs and recruitment, something which other business owners may find relatable.

Dave then looked at a more positive change impacting business: the considerable and rising importance of digital transformation. He explained how his company helped a customer move from inputting orders manually to an online portal – saving thousands of hours. Dave went on to highlight how digital transformation can improve processes, reduce costs, and create more agile working. This also tied into the principles of process improvement and how research and development can play its part.

Next up, Neil introduced James Robbins (Harrison Drury) who explained that although businesses received some breathing space during the pandemic through government support schemes, he predicts that concerns over insolvency are likely to increase over the next few years. James advised businesses that may find themselves in this position to obtain legal advice as early as possible to achieve the best outcomes. Transparency, honesty and a degree of vulnerability would better serve a business – the key message was to reach out for support. This was endorsed by attending guest Andy Platt of Simply Corporate.

James also discussed the hospitality sector, explaining that although the relaxation of Covid restrictions is helping towards recovery, there are still major issues concerning staff retention and the impact of rising inflation. He viewed low-cost and higher-end offerings as being perhaps better positioned than those who inhabit the middle ground. Finding a differentiator perhaps being the key to survival and success.

To finish up, James offered a forecast for 2022 regarding property tenancy, suggesting that we may be on the path to a return of normalcy with lease forfeits and landlords now be able to pursue rent arrears – a welcome change for property owners.

Amin Kamaluddin of SK Growth, our next speaker, gave some insights into the world of SK Growth, explaining how they help businesses with:

  • Scaling up
  • Looking to grow, but have run into some barriers and need advice
  • Getting sale-ready

Amin spoke about the importance of strategy in businesses – namely how implementing a strategy can be harder than creating one. He discussed the McKinsey’s 7-S model which focusses on strategy, structure, systems, shared values, skills, style, and staff – all of which should ideally be balanced for an organisation to perform well. The idea that culture tops strategy and the importance of this for recruitment and retention was also endorsed by guest and employment lawyer Emma Saunders (Napthens).

Our final panellist, Dave Scholes (Six Connections), offered his agreement to Amin’s points by emphasising the importance of a company culture that prioritises employee mental health and wellbeing. Dave explained that a business which aims to genuinely understand the professional and personal parts of an individual can vastly improve a person’s wellbeing.

Neil brought the panel discussion to a close and opened the floor to the audience, with additional comments and thoughts from Ceri Dixon (PM+M), Andy Platt (Simply Corporate), Roger Phillips (PM+M) and Andi Lewis (Six Connections) before thanking the panel and Claire Rhodes (The Landmark) for hosting the event.

If anyone would like to be introduced to members of the panel or audience, included in the invite for next month’s event or wish to speak to one of the PM+M team about our services, please get in touch with Neil Welsh via the button below.

A ROUNDUP OF OUR ‘NAVIGATING THE NOW AND NEXT’ EVENT – THURSDAY 27 JANUARY

The twelfth in the series of PM+M’s ‘Navigating the Now and Next’ virtual panel events took place on Thursday 27 January, facilitating discussion between a panel of speakers on the ongoing challenges presented to businesses and highlighting what support is available as we look to the future.

Hosted by our very own Neil Welsh, with digital hosting managed by our friends at The Landmark in Burnley, we welcomed panellists:

Mark Williams – MD, Greenbank Technology

Paul Sharples – Business Solutions Manager, Burnley College

Jeanette Berry – Head of Private Client, Portfolio Legal

Roger Phillips – Tax Director, PM+M

Following the opening introduction and welcome from Neil, Mark Williams began the proceedings by discussing his role as Managing Director at Greenbank Technology and how he helped the business recover and thrive following his appointment.  Mark reassured business owners that it is possible to recover reduced turnover and losses with improvements to company culture and employee engagement. Mark cited open communication with his employees, positive challenge and teamwork as paramount to the ongoing success of the business.

Mark also discussed the increasing importance of sustainability in the capital equipment industry, noting that customers would inquire beyond the recyclability of their products to the sustainability of the machines used to create them. In addition to the importance of sustainability to consumers, sustainable thinking can benefit businesses – for example, it can help them decrease their costs on energy, which in turn, reduces their carbon footprint.

To carry on the conversation of sustainability, Neil welcomed Paul Sharples (Burnley College). Paul spoke of how conversations about sustainability are picking up more traction – particularly where funding and bidding is concerned, notably in regard to the Strategic Development Fund. He talked us through various local projects and collaborations, including some of the innovative solutions to be implemented onsite at Burnley College to showcase best practice in a low carbon world.

Neil steered the conversation to the future of apprenticeships. Paul highlighted that there is an enthusiastic demand for apprentices from employers and a definite increase in demand for apprenticeships from young people.  There seems to be an increased calibre of young people coming through colleges, which impressed businesses – Mark agreed with this statement and shared his experience of being highly impressed when speaking to students during a Burnley College COP26 event.

Next up, Neil introduced Jeanette Berry who works in Private Client law, collaborating with individuals to maintain their wealth and potentially minimise tax. Jeanette made many valuable points, particularly about the creation of wills. Although more and more people are aware of the importance of having a will, there are still many people without one. Jeanette warned against researching wills online and ‘doing it yourself’, without taking legal advice, which could lead to negative outcomes when it is too late to resolve. She also expressed the importance of taking legal advice from an expert you can trust and registering a Lasting Power of Attorney – should the unexpected happen. She added that business owners, especially sole directors, should consider putting a business Lasting Power of Attorney in place as part of their disaster planning.

Our final panellist was PM+M’s very own Roger Phillips – he overlaid Jeanette’s valuable contributions by adding that, with common law, there was a risk of a hefty inheritance tax for unmarried spouses without a will. Roger then gave some insight into the possible forecasting for tax policy, mindful that this tax year will soon end on 6 April 2022.

Here are some of his tax tips:

  • Given that National Insurance tax will rise, business owners may benefit from bringing forward bonuses through salaries or wage increases to before tax year end to avoid the additional 1.25% national insurance charge
  • Stick money into your pension pot to help stay below income tax thresholds. Important when the government could possibly limit the amount you are able to pay to benefit from tax relief in future (currently standing at £40,000 per year)
  • Make use of any allowances, including ISAs, before the tax year end to benefit from tax efficient growth or income, not only for yourself but also for your family

Roger then reiterated Jeanette’s point on how it was better to liaise with an expert in the field when making a financial decision, rather than looking for a cheaper option and giving yourself the best chance of a positive outcome.

Neil brought the panel discussion to a close and opened the floor to the audience, with additional comments and thoughts from Helen Clayton (PM+M), Andy Platt (Simply Corporate), Paul Nicholls (Barclays Corporate) and Dave Scholes (Six Connections) before thanking the panel and Claire Rhodes (The Landmark) for hosting the event.

If anyone would like to be introduced to members of the panel or audience, included in the invite for next month’s event or wish to speak to one of the PM+M team about our services, please get in touch with Neil Welsh via the button below.