It can take years of hard work to build a successful business, and so exiting that business can be a very difficult decision for an owner to make. For others who have an exit strategy in place finding a buyer may be difficult, particularly in certain industries. At Stephensons we understand how important it is for business owners to sell their business with the confidence that it will continue to grow well into the future and that their legacy is protected. Traditional sales do not always provide for this and this is where an employee ownership trust could help.
What is an employee ownership trust?
An employee ownership trust (EOT) is a special kind of employee benefit trust first introduced by the government back in September 2014. In an EOT, a trust holds the majority stake of a business on behalf of its employees. The employees will not run the business but will have a financial stake in it by owning shares (held by the trust) and they will also have a say in how the business is run. This particular business model has been made famous over the years by companies such as John Lewis.
How does an employee ownership trust work?
Firstly the business will need to have an independent valuation for a share price to be calculated. Once a share price has been established the shareholder(s) will sell their shares to the trust. The purchase price will be left as a debt owed by the trust to the shareholders. As the business continues to trade its post-tax profits will be used to fund the trust and the trust will use this to pay the former shareholders.
Are there any tax advantages?
If the employee ownership trust will own more than half of the business there will be no capital gains tax payable by the owner when they sell their shares to the trust. Employees will also be able to benefit from an annual tax free bonus of up to £3,600.
What are the benefits of an employee ownership trust?
Aside from the tax advantages there are several other benefits associated with using an employee ownership trust as a means to exit your business. These include:
- Protecting the business legacy
- An employee ownership trust creates an immediate buyer for the business
- The transaction tends to be quicker and less formal than a traditional sale
- Employees are more engaged with the running of the business and likely to feel valued as a result. This can lead to various other benefits to the business such as increased productivity and profits.
- Business owners do not need to worry about succession if they have no suitable family members or business partners who are able, or willing to, take over the business.
Our commercial law solicitors aim to make the process of selling businesses as smooth as possible for our clients and we are happy to discuss the different options available to you. We also work with experienced partners who can provide guidance through the tax areas of the process. To find out more about how we can assist with an employee ownership trust call our team on 01616 966 229.