Employee ownership trusts

Have you considered selling your business to an employee ownership trust?

In 2022, nearly 500 employee ownership trusts (EOTs) were set up, more than double the number established the year before.  At Clarke Willmott, our corporate solicitors across the country are increasingly being asked to advise on the sale of businesses to EOTs.

What is an EOT?

An EOT holds the shares in a company on trust for the benefit of that company’s employees. Rather than selling to an external buyer, the owners of the company can sell their shares to the EOT, providing an alternative for founders looking to exit or retire from their business.

What are the benefits of employee owned trusts?

• Tax – There can be significant tax benefits for the selling shareholders, including an exemption from capital gains tax.
• Ease – Typically a sale to an EOT will be a “friendlier” transaction than a third party sale. There will generally be minimal negotiation (saving time and legal costs) and the final terms will usually be less onerous for the selling shareholders.
• Resolution – They provide an option for selling a company where an appropriate buyer cannot be found.
• Positive legacy – For some founders, it is a way of “giving something back” to their employees and creating a positive legacy. Often, there are greater opportunities for the sellers to remain involved in the business following the sale.

Employee ownership trusts – what business owners need to consider

1. 1. An employee ownership trust will rarely be able to pay the full purchase price for the shares on completion, so payments are typically deferred over several years.
   2. The ability of the EOT to pay will depend on the future financial performance of the trading company and options for securing these payments may be limited. This means there is an inherent risk that you will never receive the full amount.
   3. Trusted leadership – There will need to be managers in the business who can be trusted to take over the running of the company when you depart (not least as your future payments may well depend on this). It can take a number of years to build a suitable team.

How Clarke Willmott’s corporate solicitors can help with EOTs

To receive the substantial tax advantages, an EOT needs to comply with strict statutory requirements. It is therefore critical to take advice from an accountant and a solicitor with demonstrable experience in employee ownership trusts.

Tom Potts is a Senior Associate in our corporate team who has recently advised on the sale of a number of well-established family businesses to employee ownership trusts. Please get in touch for expert advice on EOTs. Your initial consultation is free and there’s no obligation to go further.