How to Set Up Employee Ownership Trusts As An Exit Route?

In business succession planning, Employee Ownership Trusts (EOTs) present an increasingly popular and strategic exit route. By transferring ownership to the people who know the business best—the employees—EOTs ensure business continuity and enhance employee engagement and job satisfaction.

What Are Employee Ownership Trusts?

Employee Ownership Trusts are a form of employee benefit trust designed to hold a controlling stake in a company on behalf of its employees. Legally, these trusts must own more than 50% of the company's shares. They offer a unique approach to business ownership that aligns the interests of employees and the business, creating a shared sense of purpose and commitment.

Benefits of Employee Ownership Trusts

  1. Enhanced Employee Engagement and Loyalty: When employees have a stake in the success of the business, their commitment to the company deepens. This often results in increased productivity, reduced staff turnover, and higher levels of innovation.
  2. Sustainable Business Continuity: EOTs provide a smoother transition with less disruption to operational activities. Since the business is transferred to the employees, the existing company culture and operational know-how are preserved.
  3. Tax Efficiency: There are significant tax advantages associated with EOTs in the UK. For instance, business sales to an EOT are usually free from Capital Gains Tax, and employees can receive tax-free bonuses up to a certain threshold each year.
  4. Community and Stakeholder Benefits: Companies owned by employees can foster a greater sense of community and can contribute positively to local economies. Additionally, stakeholders often view employee-owned companies as more stable, which can enhance business relations.

Why Consider EOTs as an Exit Strategy?

For many business owners, crafting a legacy and safeguarding the company's core values rank highly among their priorities when planning an exit. Employee Ownership Trusts (EOTs) represent a strategic choice that respects these desires and offers a robust framework for the company's future. Here’s a closer look at why EOTs are an increasingly popular exit strategy:

  • Preservation of Legacy and Culture
    EOTs ensure that the business continues to operate under the guiding principles and culture established by the founder. Unlike traditional sales, which may lead to significant changes in company direction and culture under new ownership, an EOT maintains continuity. This consistency is often crucial for businesses where brand identity and company ethos are closely tied to their success.
  • Alignment with Existing Values
    By transferring ownership to employees, EOTs help preserve the operational standards and business practices that employees and customers have come to expect. Employees, who are now owners, inherently understand and value the company’s mission and are more likely to make decisions that align with these established values, ensuring the business remains true to its roots.
  • Flexible Transition Planning
    EOTs offer considerable flexibility in the transition process. Unlike the abrupt change of control seen in acquisitions or mergers, transitioning to an EOT can be planned over several years. This phased approach allows the current owner to gradually reduce their involvement, smoothing the transition for both employees and customers. It also allows the owner to remain involved in a reduced capacity, offering guidance and leadership as the new owners settle into their roles.
  • Enhanced Retirement Planning
    For owners considering retirement, EOTs can be structured to provide a steady income stream funded by the business's profits. This setup not only secures financial stability for the retiring owner but also aligns the business's success with the owner’s financial well-being, creating a win-win scenario.
  • Employee Motivation and Retention
    Turning employees into owners can dramatically increase their commitment to the business. Ownership gives employees a direct stake in the company’s success, leading to increased motivation, better performance, and lower turnover rates. The increased stability and dedication often translate to sustained business performance and growth, underpinning the company’s long-term viability.
  • Tax Efficiency
    In the UK, selling a business to an EOT can offer significant tax advantages. For instance, sales to EOTs are exempt from Capital Gains Tax, making this an attractive option for owners looking to maximise the financial benefits of their exit strategy. Additionally, the structure allows for tax-efficient ways to reward employees, further enhancing the appeal of this exit route.

Steps to Setting Up an Employee Ownership Trust

  1. Initial Planning:
    • Assess Suitability: Review whether your business is a good candidate for an EOT, considering factors like size, profitability, and employee interest.
    • Consult Stakeholders: Engage with key stakeholders including existing shareholders, managers, and employees to gauge interest and discuss potential impacts.
  2. Valuation and Financing:
    • Business Valuation: Obtain a professional valuation of your business to determine a fair price for the shares being transferred to the trust.
    • Financing the Purchase: Decide how the EOT will finance the purchase of the shares. This typically involves the trust taking out a loan, which is then paid back using future company profits.
  3. Legal and Financial Setup:
    • Draft a Trust Deed: Work with a solicitor to create a Trust Deed, defining how the EOT will operate, the rules it must follow, and how it will benefit the employees.
    • Set Up a Trustee Board: Establish a board of trustees overseeing the EOT. This board often includes representatives from the workforce, the existing management team, and sometimes an independent trustee.
  4. Communicate the Change:
    • Inform and Train: Keep all employees informed throughout the process. Training may be necessary to help employees understand their new roles as co-owners.
    • Celebrate the Transition: Mark the transition to employee ownership with a formal announcement or event, reinforcing the positive aspects of the change.
  5. Post-Transition Support:
    • Ongoing Education: Continue to educate employees about their roles in governance and the financial aspects of their new ownership status.
    • Monitor and Adapt: Review the EOT's performance regularly and make adjustments as necessary to ensure the success of the new ownership structure.

Contact us to talk about setting up an employee ownership trust for your business today.

Rob Boll
Founder & CEO