Employee Ownership Trust: Important Questions and Answers
If you’re looking to safeguard the continuity of your business in the long-term, then you might have already looked into an Employee Ownership Trust. This is a means of transitioning toward an employee-owned business. It’s often favoured by business owners looking for an exit strategy – though other kinds of business might also benefit.
Let’s look at a few common questions surrounding EOTs.
Are EOTs difficult?
Contrary to popular misconception, an Employee Ownership Trust can actually be quite straightforward. It starts with the establishment of a corporate trust, which can acquire the business via a range of different financing options, including third-party loans.
The intricacies of the arrangement will largely depend on the structure of the business as it stands already. This is where a competent advisor can be worthwhile: they’ll come in, assess the lay of the land, and recommend an optimal solution for everyone.
Are EOT sales below value?
You might suppose that, because you’re selling to a more limited field of potential buyers, you won’t be able to generate quite as much from the sale of the business. This is true – but there are a few reasons that EOTs might be more competitive than you think.
Sales to Employee Ownership trusts are exempt from capital gains tax, which can make them extremely attractive to certain kinds of individual. The government has done this with the understanding that business of this kind are more sustainable in the long-term, and therefore more effective tax contributors.
Isn’t there more Paperwork?
It’s fair to say that Employee Ownership Trusts will impose an additional administrative burden. But, provided that this is anticipated and accounted for from the outset, there’s no reason that these challenges can’t be managed effectively.
For the most part, the founding of a trust has very limited impact on the way that the business operates on a day-to-day basis. The knock-on cultural consequences of the shift might far outweigh the immediate paperwork, with EOT businesses tending to shift fairly rapidly toward a directorship model.
In contrast with Management Buyouts, an EOT doesn’t require employees to have the money to invest directly into the business. Instead, the funds are usually generated from elsewhere, and the proceeds held in trust. With that said, there’s no reason that employees can’t involve themselves financially, if they have the means available to do so
