BUSINESS FOCUS
SELLING TO YOUR EMPLOYEES: A GROWING TREND
Employee Ownership Trusts are a tax-efficient way of exiting a business, ensuring it remains in the hands of those most equipped to run it, as Richard Cowley explains.
O
wners looking to exit their business can sell to an Employee Ownership Trust (EOT), which offers the best chance for the business to continue to flourish in the hands of the experienced employees who helped it be a success. The owners must sell a controlling stake to their employees, but can, if they so choose, retain up to 49% of the share capital, and remain involved in the business. This approach is growing in popularity because there is no need to make immediate or significant changes to the senior team, which typically ensures a smooth exit for the owners and less disruption to the business. After transition, the trust owns the shares on behalf of the employees, who then own the business indirectly. This provides a clear framework for employee ownership, whilst offering significant tax and other advantages for the selling owners. Third-party funding is available from specialist lenders, though more typically, the purchase is funded by the company out of reserves and future profit. Effectively, the sellers lend the money for the trust to buy the company from them, with a typical repayment period being five to six years.
Importantly for those owners wishing to leave a legacy or remain involved, selling to an EOT is gentle on the business and its day-to-day activities. There is no requirement to change the management structure and the selling owners can remain as directors of the business. As the loan is repaid to the exiting owners and their eventual exit approaches, planning the new management structure becomes important. However, this can be undertaken at a pace that suits the exiting owner(s), the business and the employees. It is a tax-efficient method of exit, as selling the controlling stake in a business to an EOT is tax-free, with all sellers able to receive 100%
Capital Gains Tax (CGT) relief. Sellers control the transaction, so it’s relatively straightforward, avoiding the need to find a buyer, get involved in complex, time-consuming negotiations and undertake the necessary due diligence.
Safeguard the future Selling to an EOT can help protect the future of the business and its employees, as exiting owners typically want the business and their colleagues to continue to thrive and grow. It also offers a highly effective way to reward the existing employees who helped build the business and keep them engaged, and it helps attract and retain the best talent. There are benefits for the employees too. Once the loan is repaid, the remaining colleagues might enjoy increased pay as an employee profit share can be introduced. There’s an element of tax-free pay as each employee can receive a bonus of up to £3,600 per year tax-free. Selling to a third-party often unsettles employees, who worry about building a relationship with new managers, changes to working practices and having to adapt to a company culture, whereas an EOT can help the company stay independent and avoid these common concerns. Such a process ensures a smooth succession, and a gradual, carefully planned, and well- managed transition, which ensures the business will run effectively on a day-to-day basis throughout the transition process. Typically the selling owners stay with the business throughout the transition and often beyond, which allows the business to continue to benefit from their experience, knowledge, expertise and connections.
When employees have a genuine stake in the future of the business by virtue of selling it to an EOT, it can significantly boost their connection to the business, which in turn can
July 2024
www.buildersmerchantsjournal.net
lead to greater engagement, productivity, and loyalty from members of staff. It is important to understand that exit strategies involving transitioning a business to employee ownership are not right for every owner or every business, but they are a great alternative to the prospect of finding and assessing the suitability of a third-party buyer. In addition to the benefits outlined, you must consider: The company needs to pay for itself, so its valuation is limited by what the company can earn over the next five to 10 years. You remain responsible for succession planning, so it’s important you plan for the medium and long term, not just up to the EOT transaction. The EOT transaction process can be quick and could be completed within three months of you contacting a specialist advisor – but you can slow the process to suit your needs. The EOT transaction brings no financial risk for your colleagues.
Timescales You can create a tax-free exit by selling your shares to an EOT. However, just as importantly, it means you are in control of your exit and do not need to deal with a third-party buyer and the complex, time consuming, expensive sales process that entails.
EOT transfers achieved with the support of specialist advisers, are amongst the quickest and easiest business sales possible, with sellers and buyers, both on the same side working towards the same outcome, making for a simple, smooth process.
The transaction will have little immediate impact on the business, but passing ownership to colleagues who helped you build the company, without facing personal financial risk, can deliver long-term benefits, that make the EOT a genuine win-win for all concerned. BMJ
21
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72
