Expert View
IS AN EOT RIGHT FOR YOU?
by David Filmer Partner at Forbes
Recently employee ownership trusts - or EOTs - have seen a significant rise in popularity as a means for a shareholder to make a tax efficient exit. But what are they, and they right for you?
An EOT is a corporate structure whereby a specially created trust takes ownership of at least 50 per cent of a company’s shares, with the employees being the beneficiaries of the trust.
Commonly referred to as the ‘John Lewis model’, EOTs are designed to put the benefits of company ownership in the hands of the employees, but there are also other benefits to consider, including:
• Generous tax incentives, including 100 per cent relief from any capital gains arising from the sale of shares to the EOT
• A selling shareholder will get a full and fair market value, due to the requirement for an independent valuation
• The trust can pay up to £3,600 per annum. by way of a tax-free bonus to all eligible employees, creating a great incentive for the employees to maximise profits
However, it is essential that a seller considers whether the EOT structure is right for the company.
If not, then the model may not work, and the seller may struggle to realise their value.
Unlike a standard sale, funding is difficult to raise, and the majority of consideration will be payable over a number of years from future profits of the business.
As such, a seller may not get the clean break that they may be seeking and is dependent on future business profitability for their cash.
In summary, EOTs can be hugely attractive to both sellers seeking an exit, and their employees, but the structure must be right for the business for it to succeed.
Steve Bell Corporate finance director
@pcaltd pierce-c.-a.-limited @PierceCA
MAXIMISING THE VALUE OF A BUSINESS SALE
For many entrepreneurs the opportunity to sell a business will be a culmination of a lifetime’s work and is likely to be the most significant financial decision of their life.
A modest investment in producing regular management accounts will provide an accurate picture of a company’s performance and financial standing. The information will allow the seller to highlight areas of potential risk and improvement thus enabling informed decisions to be made and value to be maximised.
With the current economic climate in a volatile state and with investment risks greater than ever, buyers are more cautious and we have seen deals delayed or collapse completely because the sellers had not seen the value of investing in accurate, timely financial information.
The family had bought Bolton Fold farm when it came up for sale in 1980. The opportunity to own their farmland and house was too good an opportunity to pass up, despite interest rates at 18 per cent.
The yogurt business came out of the need to create extra revenue. In those early days Ann sold 30 dozen pots a week to small local shops. As the business grew, Lancashire based grocery chain EH Booths was one of the first supermarkets to stock Forshaw’s products, followed by James Hall.
There were difficult times to be navigated. At one stage the bank proposed the sale of some of the farmland and 40 of the dairy herd to help solve some of the financial challenges.
However, as a result of her determination the bank gave Ann another six months, declaring after that time that she and her family had “done the impossible”.
The late 1980s also saw a new dairy built to cope with the volume needed to supply Forshaw’s then main customer, a German supermarket chain, only for it to lose the work and 80 per cent of the business to another company on price. More determination and persistence were required.
Ann says: “Across several decades I have poured all of my energy and passion into growing the business and with the support of a wonderful team we have
developed the brand and product range in to what it is today.”
Looking at the sale, she says: “I felt that the time was right for me to sell the business and I was keen to ensure that Alston Dairy and the Ann Forshaw’s brand was sold on to a company that has shared values and is similarly family-owned, so I am very pleased to complete the deal with James Hall.
We are keen to
grow the business further and see a huge amount of potential in the Ann Forshaw’s brand
“I am also very excited to remain as a director of the business, together with Emma, to bring to life the new ideas that we have for Ann Forshaw’s products,
“And I am very much looking forward to a future where even more Spar customers can access our fantastic yogurt range.”
The market for those products remains large with Britons spending more than £2bn a year on yogurt products. In 2021, production of yogurt in the UK totalled approximately 463,000 tonnes.
LANCASHIREBUSINESSVIEW.CO.UK
This information provides the prospective buyer with detail of current trade, allowing them to commit to a transaction. It also ensures that the deal can accelerate through the detailed financial due diligence process. The due diligence process is time consuming and can be a significant distraction for the sellers due to the level of detailed information that is required.
A successful business sale is driven from managing the information flow to the buyer. Whilst accurate, timely information will not in itself attract a buyer, the lack of information will create uncertainty and can ultimately kill a transaction. Therefore, a modest investment in preparing information will allow you to realise and retain value through a disposal process.
If you are contemplating a disposal an early conversation with an experienced corporate finance advisor will pay dividends as they will understand the motivations of a buyer and can identify what information will be important to ensure your story is told and value is maximised.
For more information please visit
www.pierce.co.uk
or call 01254 688100
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