As the owner of a business, when you start to consider your exit, instead of a third-party sale, there is the option to transition ownership to your colleagues, by selling to an Employee Ownership Trust (EOT). 
This not only offers the best chance for the business to continue to flourish during your exit timeline, but after you finally leave it in the hands of the experienced employees who helped you build the business.
To transition your business to employee ownership, you must sell a controlling stake to your employees, but you can remain involved in its future, by retaining up to 49 per cent of the share capital yourself.
This approach to exiting a business is growing in popularity because there is no need to make immediate or significant changes in your senior management team, which typically ensures you achieve a smooth exit and the business faces little to no disruption.
After the transition, the trust owns the shares on behalf of the employees, who then own the business indirectly. Selling to an EOT provides a clear framework for employee ownership, while offering significant tax and other advantages for you as the selling owner[s].
Funding for the share purchase is available from specialist lenders, but more typically, the purchase of the shares by the EOT is funded by the company out of reserves and its future profit. Effectively, you lend the money for the trust to buy the company from you and you can expect the repayment period of this loan to be five to six years.
Importantly, if you wish to leave a legacy or remain involved, selling to an EOT is gentle on the business and its day-to-day activities. There is no requirement to change the management structure and you can remain as a director of the business.
As the loan is repaid to you and you finally decide it’s time to leave the business completely, planning the new management structure becomes important, but this can be achieved at a pace that suits you, the business and the employees.
What are the advantages for you selling your business to an EOT?
It is tax-efficient – selling a controlling stake in your business to an EOT is tax-free, with all the sellers able to receive 100 per cent Capital Gains Tax (CGT) relief.
Sellers control the transaction – selling your business to a trust is relatively straightforward and avoids the need for you to find a buyer, get involved in complex, time-consuming negotiations and undertake the necessary due diligence.
Securing the future – selling to an EOT can help protect the future of your business and its employees, as exiting owners adopting this route, will typically want the business and their colleagues to continue to thrive.
Attract and retain talent - selling to an EOT, not only offers a highly effective way to reward your existing employees who helped you build the business and keep them engaged, but it helps attract and retain the best talent.
What are the advantages of working for a business held in an EOT?
Personal financial benefits – once the loan has been repaid, the remaining colleagues might enjoy increased pay as an employee profit share can be introduced.
Element of tax-free pay - each employee can receive a bonus of up to £3,600 per year tax-free.
Remain independent – selling to a third-party often unsettles employees, who worry about building a relationship with the new owners and their manager, to say nothing of adapting to new working practices and changes in company culture. An EOT can help the company stay independent and avoid these unsettling concerns for your employees.
What are the advantages for the business of selling to an EOT?
Smooth succession – transferring the business to an EOT allows for a gradual, carefully planned, and well-managed transition, which ensures the business will run effectively on a day-to-day basis throughout the transition process.
Experience and expertise – typically, you will stay with the business throughout the transition and often beyond, which allows the business to continue to benefit from your experience, your expertise and your industry connections.
Employee engagement - when employees have a genuine stake in the future of the business by virtue of selling it to an EOT, it can significantly boost their connection to the business, which in turn leads to greater engagement, productivity, and loyalty.
Remember, if you are considering selling your business to an EOT, then the benefits outlined above must be clearly and regularly communicated to everyone within the business, to ensure a smooth transition. Communicating the benefits to your customers, who may worry what will happen when you leave, will also help the business continue to thrive.
The key considerations when selling to an EOT
It is important to understand that exit strategies involving transitioning a business to employee ownership are not right for every owner or every business. However, they offer a great alternative to the prospect of finding and assessing the suitability of a third-party buyer, that may have been a competitor for years.
In addition to the benefits outlined above, you must consider:
- The company needs to pay for itself, so its valuation is limited by what the company can earn over the next five to ten years.
- You remain responsible for succession planning, so it’s important you plan for the medium and long term, not just up to the EOT transaction.
- The EOT transaction process can be quick and could be completed within three months of you contacting a specialist advisor – but you can slow the process to suit your needs.
- The EOT transaction brings no financial risk for your colleagues.
Timescales and planning your exit
By selling a controlling stake to an EOT, you can create a tax-free exit for yourself. But just as importantly, it means you are in control of your exit and do you not have the stress of dealing with a third-party buyer and the complex, time consuming, expensive sales process that entails.
With the support of specialist advisers, EOT transfers are amongst the quickest and easiest business sales possible. With you as the seller and your colleagues as the buyers, both on the same side working towards the same outcome, it is usually a simple, smooth process.
Ultimately, the transaction will have little immediate impact on the business, but passing ownership to colleagues who face no personal financial risk from the process, can deliver long-term benefits, that make the EOT a genuine win-win for all concerned.
Find out more about the RM2 Ownership Partnership
