In recent times, one business model that has been gaining momentum is employee ownership trusts (EOTs). Introduced in 2014 to encourage greater employee ownership in business, EOTs are now becoming a common structure that can benefit the business and staff in a number of different ways.
How Does an EOT Work?
So, how exactly does an EOT work? This involves an employee trust acquiring a controlling stake in the company as part of an exit or succession planning strategy. An EOT must be for the benefit of all employees equally and the price for the controlling stake is the current market value (established with an independent assessment). Employees do not directly own shares in the company but are beneficiaries of the trust (which has a controlling share).
Advantages of an EOT
There are a number of benefits of an EOT, which is why it is becoming such a popular ownership model. First, it is free of capital gains tax which means that businesses can benefit from savings of 10% to 20%. In addition to this, the business will have a trusted workforce and employees that are motivated for the business to perform to its potential – this means that businesses often perform to a high level under an EOT. Employees can also receive tax-free annual bonuses of up to £3,600 and there are no negative financial implications from the employee’s point of view.
Disadvantages of an EOT
While there are many benefits of an EOT for the seller, employees and business as a whole, you will find that there are a few drawbacks that need to be considered. These are that the seller may not receive a large amount of the sale funds until the business has earned enough profits after the sale (although external financing can help). Another important consideration is that significant future tax charges can arise if the EOT loses its controlling interest in the company.
It is easy to see why EOTs are on the rise as they can benefit the seller, employees and the business as a whole. Businesses owned under an EOT often go on to achieve high levels of success and benefit from a motivated workforce with a vested interest in the success of the business. From a seller’s point of view, there are major tax incentives and you know that you are leaving the business in safe hands with your workforce. It is also a complex process and there are key considerations, which is why you should always work with an expert to guide you through the process.