Does Employee Ownership work as a business Exit Strategy?

Have you considered an employee ownership trust as your business exit strategy?

An employee ownership trust (EOT) might not be the first thing that springs to mind when you start to plan your business exit strategy but with plenty of benefits to this approach, is it time you took a closer look?

There are many ways to exit a business you’ve worked hard to build, and the right strategy for you will depend on your unique circumstances. Often disregarded due to perceived financial barriers, an employee ownership trust is well worth considering.

What is an employee ownership trust and how does it work?

An EOT is a trust that is formed for the benefit of all eligible employees. The trust must benefit all employees on the same terms, this does not mean that all employees will receive the same financial rewards – just that the rewards must be calculated in the same way. A common method is to use a points system. Points are then allocated for example for years of service or current salary banding.

This exit strategy is exactly as it sounds: you sell your ownership of the business to the EOT. The trustees then take over the running of the business, it is usual for a shareholder to continue with the business as a trustee, at least until all of the sale proceeds have been paid.

EOTs will typically be financed by future business profits which are gifted to the trust, the trustees will then use these funds to pay the sale proceeds. This exit strategy will usually see you retain some interest in the business for a period of transition, rather than it being an ‘overnight sale’. This can give a business owner the often welcome benefit of a phased exit with the peace of mind that the business is well looked after once they do step away permanently.

Bank loans and specialised lending services are also sometimes used, this can be particularly useful where the vendor would like a large portion of the sale proceeds upfront.

What are the benefits of an employee ownership trust?

There are plenty of benefits of choosing an EOT for your business exit strategy, including:

• Shareholders can sell shares without incurring a capital gains tax liability
• Ability to control the transaction timescale
• An EOT provides an immediate buyer and avoids the need to market the company
• Negotiations are often much simpler when compared to a third-party buyer
• Ability to remain involved as a trustee to ensure robust ongoing leadership and management, for a lower-risk and more future-proofed outcome
• Long-term stability for the business and workforce

One great benefit for employees is that they can indirectly own company shares without having to personally make a capital contribution. Employees of companies that are owned by EOTs can receive bonus payments of up to £3,600 per annum that will not attract any income tax. In addition, although an EOT is intended to be a long-term ownership model, if there is a future sale employees will benefit from this. As employees can now participate in the company’s success, you may find these additional benefits of employee ownership that help to drive future growth:

• Increased employee motivation and engagement
• Increased productivity
• Improved staff retention and talent acquisition
• Reduction in employee absences

“Over 100 studies across many countries indicate that employee ownership is generally linked to better productivity, pay, job stability and firm survival” – Douglas Kruse, Rutgers University, USA and IZA, Germany*

Of course, as with any exit strategy, an EOT does have some potential drawbacks too. Whether or not this approach would work for you will depend on many factors, such as the current company culture, the employee base, your own personal financial needs and future plans.

Bespoke advice on exit strategies

If you’re looking to develop an exit strategy and need some tailored advice, our business experts are here to help. Just drop us a line and we’ll guide you through employee ownership – along with your other options – and help you to weigh up the pros and cons, so you get the best outcome possible.

*Source: https://wol.iza.org/articles/does-employee-ownership-improve-performance/long