Employee Ownership Trust
Where do you see your business in the future? Sold to a third party? In the hands of your current management team? Or perhaps in the hands of the people who helped you to build it?
If you like the sound of option three, an Employee Ownership Trust might be right for you.
Since 2014, the Government has been keen to encourage employee ownership by incentivising business owners to sell their shares not to a third party, but to an Employee Ownership Trust (EOT).
The basic principles are that as a business owner you sell more than 50% of your shares to an EOT, established for the benefit of all your employees. The important point here is that you are selling a controlling interest in your business. Your business is independently valued, to ensure you receive market value for your shares.
The EOT can fund the purchase from surplus cash in the business, from a bank, or from future trading profits. The Government incentivises business owners to take this route by making all payments made to you for your shares, up to their full market value, free of Capital Gains Tax.
The trading business continues to be run by the existing management.
The EOT is run by a group of trustees which includes employee representatives and yourself, if you wish, as the outgoing shareholder.
The EOT can also pay employees a regular profit-related bonus, so long as all employees receive a bonus, which can be entirely equal or varied according to salary, hours worked or length of service. The first £3,600 of any bonus paid is not subject to Income Tax. The EOT can choose to pay higher bonuses than this, but any amount of the £3,600 threshold will be subject to Income Tax.
Employees do not own shares directly, instead they are beneficiaries of the EOT. The advantage here, is that employees can join and leave the trading company without the need to buy and sell shares.
Businesses that are employee owned in this way, report higher employee engagement, increased productivity and increased resilience. Business owners who choose this route see it as a way to preserve the culture of the business they have built and reward those who have helped them to build it.
It is not the right route for every business, but if you think it could be right for yours, get in touch without obligation, with Craig Simpson craigs@batesweston.co.uk or Richard Coombs richardc@batesweston.co.uk to find out more.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.
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How is the EOT funded and the shares paid for?
The EOT is a new entity and has no cash of its own. The trading business uses surplus cash, or bank funding to pay all or a portion of the purchase price to the vendor shareholders. Any remaining balance of the purchase price is usually transferred into the EOT from trading profits and paid as deferred consideration to the vendor shareholders over an agreed timescale.
Do all employees benefit equally from an EOT?
Employees do not own the shares in an EOT backed business; they are potential beneficiaries of the Trust. In general, all employees benefit from the EOT on equal terms though the Trustees have the power and flexibility to differentiate between different employees based on factors such as length of service, working hours and salary. These differentiators must be published for the reference of all employees
What will change for me on a day to day basis?
The ethos and culture of the business is what this process is designed to support and maintain so that employees and customers see no tangible changes when an EOT takes ownership of the company shares. It has been reported by employees of companies owned by an EOT that they feel more motivated because they feel a part of the business and feel able to help shape and benefit from the successes of the business.
What happens if I decide to leave the company?
As an employee of the company you will not own shares directly but instead will be a beneficiary of the EOT. Therefore if you decide to leave the company, you will no longer be a beneficiary of the EOT – this will happen automatically upon leaving. There will therefore be nothing you need to do and nothing to report to HMRC.
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