Employee Ownership Trusts
In this blog we examine an alternative option for selling a
business, Employee Ownership Trusts, or EOT’s. EOT’s are a relatively new but
growing alternative to a standard sale of a business, especially where there
are more complex succession issues, and also where it is intended to reward
employees of the firm. There is some complexity to EOT’S, but salient features
can be summarised as follows:
- A recent independent report found that among
employee-owned businesses, there were increased levels of productivity and
efficiency, improved workforce retention, easier recruitment and
- An EOT offers an attractive route for those
prioritising the legacy and culture of the business. It’s more a philosophical decision than a
- An EOT can be the best solution for a business
to keep the whole team in place and to provide continuity for a creative
culture, with those that create value in the company continuing to benefit
directly from that value.
- Employee ownership requires two things. There must be a mechanism where the ownership
can be shared among all employees.
Equally the business has to have a culture and a structure where
employee influence and voice can be shared.
The two are intrinsically linked, otherwise all the benefits will not be
- There are three requirements that the EOT
ownership structure must meet. First,
all employees must benefit. Second, they
must benefit on an equitable basis. And
third, there is the “controlling interest” requirement – essentially the trust
must have control in different ways over voting rights and profits.
- With an EOT the trading company effectively
funds the transaction itself, so the majority of transactions are funded by
vendor loans or deferred consideration. These are repaid by the trading
company, although excess cash could be used to make a repayment at
completion. A minority will also get
third-party bank debt again taken out by the trust, which will also be repaid
by the trading company.
- One EOT characteristic for the selling founder
is that they will not usually get full payment on completion, although it is
not uncommon for a “philanthropic” owner to compromise on price.
- One issue is how the deal is funded. Being
people-heavy and asset-light, there may be little security against which to
raise debt for growth. However, providing it is well structured, there should
be headroom in the repayment schedule, which allows for operating cash to fund
- Another issue is that a potential disadvantage
is the inability to get cash out. But it is effectively long-term “patient”
capital, which is what the founder wants, because they want to see the name
remain and their business continue to grow.
- The tax benefit is also very often a key
motivator for any founder who wishes to sell their business to an employee
ownership trust (EOT).
Essentially under an EOT the entire share capital of a business are
acquired, providing an exit for all shareholders on equal terms, financed out
of future profits. But EOT’S are a complex issue and as with all such matters,
good professional expert advice should always be taken, as individual
circumstances can differ considerably.
15 August 2019