Employee Ownership Trusts (EOTs) are an increasingly popular succession option for UK business owners who wish to secure their company’s future and reward employees.
The model boasts several benefits, from tax advantages to improved employee engagement and stability for the business.
Several UK businesses have successfully transitioned to an employee ownership trust, which is an appealing model for long-term sustainability.
What Is an Employee Ownership Trust (EOT)?
An employee ownership trust is a structure in which a company is transferred to a trust that holds a controlling stake in the name of its employees.
Instead of selling to an outsider, the company remains in the hands of its employees, and they all have a collective responsibility to make it succeed.
Introduced in the UK under the Finance Act 2014, EOTs encourage employee ownership as a business model.
To qualify, the trust must own a minimum of 51% of the business. This ensures long-term benefits and business continuity for employees.
Tax Benefits for Business Owners
One of the main incentives for a sale to an EOT is the tax advantages. Business owners selling their business to an employee ownership trust can enjoy a full exemption from Capital Gains Tax (CGT), avoiding the standard CGT rate of up to 20%.
Furthermore, EOT companies can give tax-free bonuses of up to £3,600 a year to all staff, establishing a direct financial incentive while fostering a culture of shared success.
A Smooth Succession Plan
For business owners, succession can be difficult. A sale to a private equity investor or outside buyer can involve lengthy negotiations and potential restructuring.
An EOT, however, offers a more controlled transition with greater control over the process.
Unlike a traditional sale, which may result in operational changes, an EOT allows the company to preserve its vision and identity.
The employees, who already know the company’s operations, continue to drive it forward without significant disruption.
Boosting Employee Engagement and Retention
One of the strongest advantages of an employee ownership trust is its impact on employee engagement.
Employee-owned businesses have been proven to have higher job satisfaction and productivity levels.
A study by the Employee Ownership Association (EOA) found that EOT businesses have improved staff morale and lower staff turnover.
Employees with a financial stake in the company’s success are more involved, which leads to higher efficiency and innovation.
Financial Stability and Long-Term Growth
EOTs create more sustainable businesses. Since ownership is kept within the company rather than external shareholders, decisions are made based on long-term sustainability rather than short-term profits.
For instance, UK companies such as Richer Sounds and Riverford Organic Farmers have had good financial performance while keeping employee welfare as a top priority.
The EOT model enables the profits to be ploughed back into development and growth instead of being distributed to outside investors.
Protecting Company Culture and Values
Most entrepreneurs make the preservation of company culture and values a priority. A sale to an EOT ensures that the business philosophy is not lost because employees familiar with the purpose of the company become its owners.
Industries that are relationship-dependent, such as customer relationship-dependent industries and service quality industries, are highly benefited by this model.
Unlike traditional acquisitions, where new ownership may mean radical changes, EOTs allow businesses to operate with continuity, preserving trust and loyalty.
Legal and Administrative Considerations
Though EOTs are very advantageous, the transition needs to be carefully planned, both legally and financially.
Owners of businesses need to consult with financial consultants and legal professionals to facilitate compliance with HMRC rules.
Setting up an EOT involves the following:
- Fairly valuing the business.
- Identifying the trust’s governing law.
- Raising finance, usually by way of a payment plan for the vendor.
- Communicating the change to employees effectively.
Examples of Successful UK EOT Businesses
Several well-known UK businesses have transitioned to an EOT model, demonstrating its effectiveness:
Richer Sounds
Electronics retailer Richer Sounds became an EOT in 2019.
Founder Julian Richer sold 60% of the company to an employee trust so that the employees could benefit from its continued success. The company has since experienced high employee satisfaction and performance.
Riverford Organic Farmers
This organic food delivery company became an EOT in 2018.
Its founder, Guy Singh-Watson, ensured that the company remained committed to ethical food production. Riverford has seen sustained growth and high staff motivation since the change.
Mott MacDonald
An international engineering consultancy, Mott MacDonald became employee-owned so that its staff could benefit from the long-term success of the company while retaining professional independence.
Conclusion
An employee ownership trust is a strong succession option for UK business owners. Offering tax exemptions, improved employee motivation, business continuity and the preservation of company ethos, EOTs provide a very attractive choice over traditional sales. Case studies of Richer Sounds and Riverford Organic Farmers illustrate the success of the model.
For business owners who are considering doing so, seeking professional guidance and planning ahead can ensure a smooth and successful transition to an EOT structure.
