Shares in future success - Employee ownership trusts
As well as offering a vehicle to structure a tax-efficient sale of a business, the EOT structure allows the company employees to benefit over the longer term as the trust influences the company’s direction rather than particular people profiting from dividends or increases in share value. This should then lead to changes in the way employees think about the company, meaning they are better incentivised and more committed to the business.
EOTs are considered a more sustainable business model and often have a high employment standard and a commitment to corporate social responsibility.
What is an EOT?
Broadly speaking, an EOT is an employee benefit trust established for the benefit of all employees of a company, and that trust then controls the business.
A qualifying EOT with a Trustee is established, then shareholders sell their shares to the Trustee by a share purchase agreement. A jointly appointed share valuation expert will set the purchase price; the purchase price (or any amount not paid on completion of the sale) will create a debt owed by the Trustee to the sellers, which will be left as outstanding deferred consideration.
The company will continue to trade and the profit used to make contributions (by gift) to the EOT. The EOT will use these contributions to repay the deferred consideration that it owes to the sellers.
EOTs are often used as part of succession planning. There are not only significant tax advantages (including capital gains tax and inheritance tax for the original shareholders) but also other benefits such as current directors can remain in the business following the sale and continue to receive remuneration packages, sale of shares to an EOT is seen as a friendlier purchase than to an outside purchaser, the company is usually allowed to continue operations in a similar manner after the sale to the EOT.
However, the trading company must remain profitable following the sale because any deferred consideration due to the sellers is usually financed by the company’s post-tax profits. The Trustees of the EOT need to be chosen carefully to avoid conflicts of interest with trustees and directors, which could result in personal liability.
For more information about EOTs and advice on how to reach your company’s full potential, please contact Julie Garbutt on 0191 211 7863 or email [email protected]