Over recent years, Employee Ownership Trusts (EOTs) have gained traction as a new way to operate a business. Stemming from the Finance Act 2014, a rising number of organisations are embracing the business model, aiming to offer employees a greater say and stake in their company’s trajectory.
Considering the shift to an EOT for your business? The journey might appear daunting initially, but it doesn’t have to be. Like most significant business transformations, moving to an EOT demands meticulous preparation to ensure the chosen model aligns with your set goals. Provided you are careful during this early stage, things will often proceed steadily from there. Working with legal experts can make the process smoother.
In this guide, Ramsdens Solicitors outlines the process of establishing an EOT, highlighting the key aspects that can ensure a seamless transition.
Understanding Employee Ownership Trusts
The UK’s Finance Act 2014 introduced the notion of an EOT, a collective ownership model where company shares are vested in a trust and managed by one or more trustees for the advantage of employees. This grants them a direct financial stake in the company’s success. While the board of directors oversees daily operations, employees acquire a financial interest in the company’s future, contingent on their continued affiliation and other conditions.
Since their inception, EOTs have witnessed soaring popularity. This rising trend is attributed to the fact that they provide multiple benefits, such as:
- Enhanced productivity: collective ownership can bolster employee engagement, leading to improved company outcomes.
- Robust employee retention: offering employees a share of the business profits can increase job satisfaction, helping to retain talent and making the enterprise attractive to prospective employees.
- Tax incentives: transitioning to an EOT can present a tax-exempt exit for business owners, while employees might enjoy tax-free bonuses up to £3,600 annually.
- Streamlined transition planning: EOTs allow owners to plan their departures effortlessly, sidestepping the traditional sales rigmarole and directly transferring stewardship to their trusted team.
Key considerations before launching an EOT
Prior to committing to an EOT, there are several factors you should consider:
- Trustee selection: the designated trustee should be well-versed with the business and capable of decision-making, effectively managing any potential conflicts.
- Governance framework: this entails distinguishing the trustee’s duties from those of the board of directors. While the board holds operational command, strategic choices affecting employees (who are EOT beneficiaries) should involve the trustee.
- Funding the acquisition: companies typically finance EOT purchases. The repercussions of this financing on the company’s fiscal health, both immediate and long-term, are crucial.
- Promoting employee participation: given that EOTs are designed for employee benefit, workers’ understanding and enthusiasm towards the initiative are essential. Transparent communication is key to garnering employee allegiance.
- Exit strategy planning: business owners must chart their exit route. An EOT sale offers a tax-efficient exit, but the purchase amount is often disbursed over years from company earnings. This must align with your personal financial plans if you want to limit your tax liability.
- Legal and regulatory adherence: setting up an EOT involves navigating legal and regulatory hurdles. Ensuring compliance requires comprehensive planning and expert legal and financial advice.
Steps to set up an Employee Ownership Trust
When you have considered the above factors, you can begin to set up your EOT. Doing so typically requires you to take the following steps:
- Feasibility analysis: examine your company’s financial health, ethos and future strategy. Gauge your workforce’s potential response to this change in structure, as engagement with employees is essential for success.
- Valuation: If an EOT seems viable, determine your business’s market value. With the help of an independent evaluator, you will be able to propose a fair amount.
- Trust deed creation: your solicitor should draft the necessary legal documentation, including a deed detailing the EOT’s operation.
- Trustee designation: after the trust deed has been created, appoint a trustee. This could be an individual, a group, a specially-formed company, or a professional trustee entity.
- EOT framework and governance: with the help of the trust deed and trustee appointment, structure the EOT and set governance protocols.
- Financing and purchase contract: the EOT will need to buy a majority company stake. This is often financed by the company itself, resulting in a ‘vendor loan’.
- Share transition: when the EOT has been established and financed, the shares are legally transferred to the EOT. This process must be overseen by a solicitor.
- Purchase balance settlement: the concluding step is settling the purchase amount, which might take a number of years to conclude. There will usually be a financial plan put in place to manage this.
Throughout the process, transparent communication with all stakeholders, especially the employees, is essential to maintaining trust and progression.
How long does it take to set up an EOT?
The amount of time it will take you to set up an EOT can vary. In most cases, it takes three to six months, from the initial evaluation to the share transfer. This can depend on many factors, such as the size and complexity of your business, whether there are any disputes to resolve, and whether any mistakes are made along the way. With a good solicitor by your side, you can be confident that the process will be as efficient as possible, avoiding any potential pitfalls and ensuring all the necessary boxes are ticked.
By partnering with legal experts and adopting a rigorous approach, you can optimise your EOT transition and enjoy benefits across your business along with your employees.