Business Owners

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Let's make it happen

Employee ownership business succession options

There are several options open to business owners considering an exit:

Sale to an External Buyer

There are many attractions to a sale to another party. Usually, a significant portion, rarely all, of the purchase price is paid at the time the transaction completes. The seller has no worries about future management of the business, or having ongoing responsibilities around legislative requirements, people issues or market forces. The buyer may be an experienced businessperson who brings innovative ideas that increase the profitability of the business, and improves the working environment and opportunities for current and future employees.

A larger company may provide an infrastructure that facilitates growth, providing more career opportunities for staff. The downsides would be that, once control passes to an external party, there can be no guarantees about the future of the business. The new owner may wish to relocate, downsize, or restructure the organisation.

A trade sale can be quite an adversarial process as the buyer tries to get the best price possible to the detriment of the seller. As with any business to business sale, there is likely to be some robust due diligence as part of the transaction. Often the sellers find themselves subject to quite restrictive conditions, such as the price depending on an increase in profits, or an agreement to remain with the business for a period of time.

Many entrepreneurs find being an employee after many years of running the show to be quite a challenge.

Management Buy-out

A management buyout can appear to make sense. The management team know the business and will understand the customers and suppliers. Investing their own cash gives them a real incentive to work to make the company succeed. The stress of raising and managing the debt required can put significant stress on the individuals and any disagreements can have far–reaching consequences.

Management buyouts are really a deferral of succession rather than a solution. At some point these managers will want to exit and the uncertainty and distraction of succession planning returns.

Liquidation

A move to employee ownership gives the company a stable ownership structure that allows shareholders to exit the company when they decide, allowing them to phase that exit offering maximum continuity to the company, employees and customers.

In 2014, a specific shareholding vehicle was introduced: the Employee Ownership Trust (EOT). The EOT buys the shares from the shareholders and holds these shares in a Trust on behalf of the employees. If more than 50% of the shareholding is sold to the EOT, then the transaction can qualify for exemption from Capital Gains Tax subject to certain conditions being met. Briefly, the main conditions are as follows:

Main conditions to achieve Capital Gains Tax exemption:
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The company must be a trading company (or holding company of a trading company)

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The EOT must be open for participation by all employees

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Any distributions must be paid in line with criteria set out in legislation (equally or according to length of service, hours worked or salary)

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Directors (and connected persons) must comprise fewer than 40% of total employees

Sale to an Employee Ownership Trust

A move to employee ownership gives the company a stable ownership structure that allows shareholders to exit the company when they decide, allowing them to phase that exit offering maximum continuity to the company, employees and customers.

In 2014, a specific shareholding vehicle was introduced: the Employee Ownership Trust (EOT). The EOT buys the shares from the shareholders and holds these shares in a Trust on behalf of the employees. If more than 50% of the shareholding is sold to the EOT, then the transaction can qualify for exemption from Capital Gains Tax subject to certain conditions being met.

A sale to an EOT is proving to be an increasingly popular succession option for business owners.

Research suggests that businesses with majority EOT ownership outperform conventionally structured firms on many metrics such as productivity, profitability, employee happiness and customer satisfaction.

Employee-owned companies can be found in just about every sector of the economy; manufacturing, construction, architecture, retail and space research, to name a few. There are benefits for employees who work in companies where the majority shareholding is in an EOT. The legislation allows for each employee to receive an annual bonus of which up to £3600 can be paid free of income tax.

How does it work?

The EOT Transaction Process

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The company is valued

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The Trust is set up

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The Trust buys the shares from the sellers

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The transaction is funded by company cash, future profits and sometimes external lending

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The sellers retain certain privileges until they are fully paid

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The Trust has overall control of the company and the company’s Board of Directors run the company