Many people dream of the time they can give up work, retire, and leave all that day-to-day stress behind. However, in the current economic climate planning a successful exit when you want, with the fee you want, is going to be challenging.
Moreover, if you’ve built a company up from nothing, you’re going to care what happens to it, even after you’ve moved on to pastures new.
That’s why robust succession planning is so vital for business owners. It’s only by putting a framework in place in advance that you can rest easy that your firm is in the right hands. Before you can build such a plan, though, you must understand all your options.
Employee Ownership Trusts (EOTs), while offering a framework for a successful exit, is an option that is often overlooked and deserves closer attention.
What is an Employee Ownership Trust?
The UK government introduced Employee Ownership Trusts in 2014. They’re a particular form of employee benefit trust. They aim to encourage wider uptake of employee-ownership models for businesses. When an Employment Ownership Trust owns a company, employees have a stake in the firm via an indirect holding.
The shares of a company are in the ownership of the Employment Ownership Trust, which makes the business’ employees its shareholders. That’s without them having to buy out the previous owners physically. It’s the employees who then have a say in how the business gets run and share in the profits made by the company.
While technically not an Employment Ownership Trust, the best-known example of a company run to this type of ownership model is the John Lewis Partnership. A trust owns a controlling stake in the firm, and all employees get called “partners”. Company profits then get shared out annually, by way of a “partner bonus”. Other examples are Aardman Animations and Richer Sounds.
Why an Employment Ownership Trust might be a good option
Employment Ownership Trusts are an ideal option for small business owners seeking more than value when selling. If you care about your legacy and your employees – and you also want a fair reward for your own hard work – an Employment Ownership Trust may be the succession option for you.
By handing over control to an Employment Ownership Trust, you can get a fair price for the company. You’ll also be sure that it will get run well and responsibly moving forward. It’s your trusted employees, after all, who can dictate the firm’s future direction. They’ll be as concerned with continuity and success for the business as its founder. Their jobs and career prospects will depend on it.
5 advantages of an Employment Ownership Trust
As well as giving owners the chance to achieve a fair sale value and a secure legacy, Employment Ownership Trusts have a range of other benefits. Let’s cover those in detail now:
Tax Benefits – Payments to a former owner from Employment Ownership Trusts are currently tax free. HMRC is trying to encourage greater employee ownership. That’s why they’ve introduced this notable tax break. You shouldn’t establish an Employment Ownership Trust purely for tax reasons, but it is a considerable benefit. There are also tax benefits for employees.
Control over timing – An Employment Ownership Trust can get instituted as and when a business owner desires. This gives them the chance to move on when they choose. They don’t have to wait for the correct buyer or investor to come along.
Value – A company can get sold to the Employment Ownership Trust at an independently assessed fair market value. The employees, however, don’t have to raise that finance at the point of sale. The former owner receives payment, over time, from the ongoing profit made by the company.
Simplicity – It’s far simpler to set up an Employment Ownership Trust than to sell a company by any other means. All other alternatives involve far more stringent due diligence. They may also need extensive warranties and possibly lengthy negotiations.
Ongoing Involvement – Establishing an Employment Ownership Trust lets an outgoing owner choose how involved they wish to stay with the firm. They can set the values and principles by which they want the company to operate. They can even continue to take a more hands-on approach if desired.
How to get started with an Employment Ownership Trust
If you’ve decided that an Employment Ownership Trust is right for you, how do you go about getting the ball rolling? Fortunately, it’s easier than you may think, though it is wise to get professional advice before starting. You need to follow these straightforward steps:
#1 – Set up a qualifying EOT for your company
#2 – Sell your shares to the EOT via a share purchase agreement. The price you receive must get set by an independent valuation
#3 – Profits made by the business get received by the EOT
#4 – The EOT pays an amount that’s determined by the original valuation to the outgoing owner each year
#5 – Any remaining annual profit gets distributed equitably to the firm’s employees
#6 – Once the former owner has received the full sale price, all profits get shared between employees
Case study – IT firm directors plan for smooth exit
Damia is an IT recruitment and project management firm. Two partners have been with the business since its set-up in 1995, and the last partner to join is in his 14th year of service.
Damia is a successful enterprise with 109 staff, a solid client base and robust business processes in place. However, the partners wanted to move on to new things. They had not heard of an Employee Ownership Trust, but after a chat with Stewart Noakes of Boardroom Advisors about their aims, he suggested it as a possible solution. The directors had not heard of an Employee Ownership Trust before, but as they learned more they decided that it might be the ideal option.
Noakes with colleagues at Boardroom Advisors and law practice Stephens Scown – which underwent an Employee Ownership Trust themselves – they guided Damia through the process.
Finance director Pat Rodgers says: “An Employee Ownership Trust is the ideal solution for us. It allows the payments to be structured over a long period of time, which is essential during the more challenging times we have today. It eases the financial pressure on the business and allows it time to plan for and bed-in succession planning for the board and senior management. It’s a fantastic way for all the employees to benefit from the growth of the business.”
The Employee Ownership Trust will give the staff a key decision-making role with a seat on its board through an employee representative, ensuring all strategic decisions are presented to the team. There will also be an independent person invited to join the Employee Ownership Trust board. Profits will be shared equally between all the employees, and if the business is sold, every employee will receive a share of the sale. All staff are eligible for the scheme, including new hires as soon as they have passed their probation period.
Founding partner Chris Bardoe is pleased that his team will not be at the mercy of new owners and re-structures and that the company culture, which has been shaped over 25 years, will remain intact and be enhanced.
Bardoe says: “The legacy we leave is hugely important to all the partners and it will give us tremendous satisfaction to see the team prosper.”
Employee Ownership Trust – key takeaways
An Employee Ownership Trust is a succession choice that will suit many small business owners. It gives them a chance to get a reasonable price for their company and secure their legacy. They can bow out from the business without fear that it will get run into the ground or wound up.
With proper preparation, transferring a business to an Employee Ownership Trust is a straightforward succession option. One that offers benefits all round.
John Courtney is CEO and founder of Boardroom Advisors