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.