Guest Article: Employee Ownership Trusts (EOT)

Insights by Alice Wooler, Senior Associate – Corporate Team, Birketts LLP.

Employee Ownership Trusts (EOTs) are a unique and innovative way for business owners to transfer ownership of their companies to their employees. This approach allows employees to have a financial stake in the company, which can foster a sense of shared purpose and community, and can lead to higher levels of employee engagement, job satisfaction, and productivity.

So, what exactly is an EOT? In essence, it is a trust fund that is established to hold a controlling interest in a company’s share capital on behalf of its employees. The trust is legally required to treat all beneficiaries equally, which means that all employees who meet certain criteria, such as length of service or hours worked, are entitled to a share of the company’s profits. This arrangement ensures that employees have a vested interest in the success of the company, which can help to align their interests with those of the business.

EOTs have become increasingly popular in recent years, with many business owners recognising the benefits of this ownership structure. One of the main advantages of an EOT is that it can help to create a smoother and more successful transition in ownership. When owners sell their business to a third party, they often face a range of challenges, including finding a buyer who shares their vision for the company, negotiating a fair price, and ensuring that the buyer has the financial resources and expertise to run the business successfully. By selling to an EOT, owners can avoid many of these challenges and instead ensure that their business is in the hands of people who know and care about it.

Another advantage of an EOT is that it can provide business owners with a way to exit their business while also leaving a lasting legacy. By selling to an EOT, owners can ensure that their company continues to operate in the same spirit and values that they have cultivated over the years. This, in turn, can help to preserve the company’s culture, reputation, and relationships with employees, customers, and suppliers.

From the employees’ perspective, an EOT can be a great way to create a more inclusive and collaborative workplace. By giving employees a financial stake in the company, owners can help to foster a sense of shared purpose and community. This, in turn, can lead to higher levels of employee engagement, job satisfaction, and productivity.

Setting up an EOT can be a complex and time-consuming process, which is why it’s important to work with a trusted legal and financial advisor who has experience in this area. The trust must meet certain conditions, such as holding a controlling interest in the relevant company’s share capital and treating beneficiaries on the same terms. Additionally, there are tax advantages associated with an EOT, such as no Capital Gains Tax (CGT) charges on the transfer of shares from qualifying shareholders to an EOT, and the ability for a company that is owned by an EOT to pay up to £3,600 each year free of income tax via a qualifying bonus scheme for its employees.

Potential issues can arise in relation to the availability of funding for the purchase. On a typical sale to a third-party buyer, the buyer will often make an immediate cash payment on completion. However, an EOT, once set up, is unlikely to have any material funds. The amount paid for the shares by the EOT will be funded from payments from the trading entity. In practice, part of the consideration paid by the EOT to the sellers will be on a deferred basis, funded out of future payments of cash, which the EOT receives from the company’s trading profits.

It is important to carefully consider whether an EOT is the right option for your business before making a decision, however Employee ownership trusts can be a powerful and credible solution for business owners who are looking to exit their business while also leaving a lasting legacy and creating a more equitable workplace. By giving employees a financial stake in the company, an EOT can help to create a more inclusive and collaborative workplace, which can lead to higher levels of employee engagement, job satisfaction, and productivity. While setting up an EOT can be complex, the enefits if are clear, and this ownership structure is becoming increasingly popular among business owners who want to ensure that their company is in good hands for years to come.

VISIT: Birketts LLP
ABOUT: Alice Wooler