The pros and cons of the Employee Ownership Trust
With a number of different exit strategies available for business owners, the sale of a controlling business interest to an Employee Ownership Trust (EOT) stands out as a tax-efficient option.
This approach, backed by the government, provides substantial tax benefits for both retiring shareholders and employees. While the tax benefits speak for themselves, there are a number of factors to consider. This guide considers the pros and cons of other factors that are crucial for shareholders to get a full picture of the EOT to ensure confidence in their decision.
Pros and Cons of an EOT: Valuation
Pros
One of the advantages of an EOT is the determination of the business's full and fair market value through an independent valuation.
Cons
However, the price may be certain but could potentially be lower than an offer from a strategic trade buyer, though such exceptional offers are rare and typically reserved for businesses with unique selling points. As always, there is the substantial risk of the deal not completing.
Pros and Cons of an EOT: Your Legacy
Pros
For those eager to maintain the business as is and preserve their legacy, an EOT provides an appealing option. The transition from direct ownership is smooth, allowing altruistic owners to feel positive about giving back to their employees.
Cons
None
Pros and Cons of an EOT: Tax
Pros
Exiting shareholders enjoy the benefit of zero Capital Gains Tax on the sale, while employees can receive annual tax-free bonuses of up to £3,600.
Cons
None
Pros and Cons of an EOT: Structure
Pros
Flexibility in shaping the deal, within EOT qualifying conditions, to meet specific objectives. It allows the option to remain a minority shareholder and allocate shares or share options to key management.
Cons
Day 1 cash is restricted by the balance sheet's cash and reserves, along with funds raised by the EOT. Deferred consideration typically makes up the remaining portion and is paid over several years.
Are you ready for a certain sale with 0% CGT
Take our 5 minute test to see if you are ready for an EOT.
Pros and Cons of an EOT: Employees
Pros
Employees benefit from shared ownership, eliminating the potential threat of redundancies that often accompanies a sale to a trade buyer aiming to cut costs.
Cons
Generally none, but it is essential to ensure the development of a credible team over time that can successfully manage the business after the owner's full retirement.
Pros and Cons of an EOT: Confidentiality
Pros
With an EOT, there is no need to market the business for sale, allowing the transaction to remain confidential until well-progressed before employees are introduced to the process.
Cons
None
Pros and Cons of an EOT: Certainty
Pros
Once the owner-manager is content with the valuation and structure, the implementation of the new structure becomes procedural. The involvement of EOT trustees minimises the prospect of difficulties, removing the need to find a purchaser and the potential for late withdrawal or price renegotiation by a trade buyer.
Cons
None
Take our 5 minute test to see if you are ready for an EOT
Take our test to see if you are ready for an exit via and EOT and then book a call to talk through the next steps .
