Article
05 August, 2021
An Employee Ownership Trust (EOT) is an alternative business ownership structure with specific benefits to both owners and employees. It involves the employees of the business holding a controlling stake in a trading company via a specifically designed trust, often appointing an advisory council and operating to a set of previously agreed on principles for the future management and progression of the company. This is intended to facilitate participation and engagement in the running and direction of the business, with benefits for both corporate governance and profitability.
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, felt especially hard in the retail sector, and the anticipated rise in UK Capital Gains Tax.
The John Lewis Partnership has the largest EOT model in the UK. More recent corporates to become EOTs are hi-fi retail business Richer Sounds, with Julian Richer, Founder and MD of Richer Sounds transferring 60% of his shares into an EOT, and organic food retailer Riverford Foods, with founder-owner Guy Singh-Watson transferring 74% of his shares into an EOT. in discussion with such founders as to why this route has been chosen, reasons quoted include:
Leading forecasters have shown that the number of EOTs is increasing at a rate of 40% per annum. With market leaders within the sector choosing this route of succession, there has been a notable spark in the level of interest in this model, and whether or not it could be viable for smaller businesses within the sector.
The sale of a company to an EOT works as follows:
The advantages for the selling shareholders are:
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 fact that sales to EOTs are generally financed through the post-tax profits of the trading company, it is important that the trading company remains profitable and cash-generative post-disposal. 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 be unable to pay some, or all, of the deferred consideration.
Employee engagement - It is important to ensure that the EOT is represented adequately in order to avoid conflicts between directors and shareholders. To establish effective employee governance and ensure transparency, the following steps could be taken:
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.
For more information contact David Filmer in our Retail department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.
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