For many business owners, selling their company is not just about making a profit, it’s about ensuring the business continues to thrive under new ownership. A growing solution is an Employee Ownership Trust (EOT), which allows workers to become owners on a tax-beneficial basis with the security of preserving the stability of the business. But is an EOT the right choice for you? Let’s explore how it works and what are the most critical considerations.
What is an Employee Ownership Trust (EOT)?
An EOT is a structure that enables business owners to sell a controlling stake in their company to a trust that holds the shares on behalf of employees. This exiting option offers several advantages, including tax benefits for the seller and a stable transition for the company. Unlike a traditional trade sale, an EOT ensures that the legacy of the business remains intact while rewarding employees with a stake in its future success.
Why Consider an EOT?
For the right business, an EOT offers several key benefits:
- Tax Efficiency: Selling shares to an EOT can be entirely free from Capital Gains Tax, making it an attractive financial option for exiting shareholders.
- Business Continuity: Unlike external buyers who may restructure or relocate the business, an EOT ensures continuity and preserves the company’s culture.
- Employee Motivation: With employees becoming indirect owners, engagement and productivity often increase, leading to long-term business success.
- Flexible Payment Terms: The sale can be structured through deferred payments, making it financially manageable for the company.
How is an EOT Funded?
Although an EOT involves transferring ownership, it is still a financial transaction that requires careful funding. Here are the primary funding options:
- Deferred Consideration
The most common approach involves the business paying the previous owners over time from future profits. This allows for a smooth transition but requires sellers to be patient, as full payment may take several years. - External Financing
Business loans can be used to accelerate payments to exiting shareholders. However, this route comes with interest costs and may require the company to use assets as collateral. - Company Profits and Cash Reserves
If the business has accumulated cash reserves, these funds can be used for an upfront payment. Future profits can also contribute to settling the transaction over time.
Is an EOT Right for Your Business?
While an EOT offers significant advantages, it’s not suitable for every business. Key factors to consider include:
- Financial Stability: The business must generate sufficient future profits to cover payments to exiting shareholders.
- Long-Term Vision: Business owners who want a quick exit with immediate payment may find a trade sale more appealing.
- Employee Engagement: A successful EOT relies on employees embracing their new role as indirect owners.
An EOT can be an effective way to sell your business while protecting its future and rewarding employees. However, careful planning is needed to ensure the transaction is financially viable and meets the needs of all parties involved. Speaking to a professional who can advise you on how to navigate valuation, funding, and tax implications is essential.
If you’re planning your exit strategy and are considering an EOT, speak to our experienced finance team so we can help you determine the best strategy for your business’s future.