29 June, 2021
EOTs were originally introduced by the Government in September 2014, in an attempt to encourage more shareholders to set up a corporate structure similar to the John Lewis model, by offering significant tax breaks. However, it took until the 2020/2021 tax year for the utilisation of EOTs to substantially spike - this is likely due to the impact of the COVID-19 pandemic and the anticipated rise in UK Capital Gains Tax.
This article will explain how a sale of shares to an EOT works, consider the advantages / disadvantages of selling to an EOT and explore why many shareholders are now choosing this sale method, over the usual sale to a third-party investor.
The sale of a company to an EOT works as follows:
The advantages for the selling shareholders are:
Also, companies controlled by EOTs are able to pay tax-free cash bonuses to their employees of up to £3,600 per employee per year.
An important point to be aware of when a company is sold to an EOT is that the purchase price is fixed at the point of sale. Therefore, should the value of the company increase post-disposal, the selling shareholders would not be entitled to any additional consideration.
Due to the way in which these transactions are generally financed, it is important that the trading company remains profitable and cash-generative post-disposal. This is because, as the original shareholders' deferred consideration is generally financed via the post-tax profits of the trading company, should the trading company become loss making then it may be unable to make payments to the EOT which in turn would mean that the trustee of an EOT may unable to pay some, or all, of the deferred consideration.
ADT Workplace Limited (ADT), a Manchester-based interior design and delivery specialist, has recently become fully employee-owned, by transferring 100% of the business into an EOT.
The founders of ADT, including the Board Director, John Clemeston, consider that some of the key drivers for the change to a EOT structure were:
Discussions were held with the Employee Ownership Association (EOA) and the benefits of placing the business into an EOT were explored - ADT soon realised this was the perfect fit for the business and now was the right time to make this move.
Is an EOT right for you?
You should consider a sale of shares to an EOT if:
We strongly recommend that you seek tax/financial advice before proceeding with any company restructuring or sale of shares.