Until quite recently, Tax Tuesday might have outlined the options for a company owner’s “exit” in terms of a trade sale, a management buy-out, a family succession, and (in exceptional circumstances) a flotation.
Since 2014, however, we have had Selling to an Employee Ownership Trust (EOT) firmly added to the menu.
For very good reasons, this exit option is gathering real momentum…………
Finance Act 2014 introduced significant taxation breaks associated with the sale of a trading company to an Employee Ownership Trust (EOT) and the ongoing preservation of EOT status.
Where the sale meets the conditions to qualify, and that qualifying status is preserved;
- the selling company owner achieves a ZERO tax charge on their disposal; and
- every year thereafter, the employees of the EOT-owned company can enjoy up to a £3,600 tax-free bonus each.
These are material tax benefits to add to an ownership structure which, research strongly suggests, is capable of inspiring superior business performance.
In the EOT structure at least 51% of the voting shareholding (ie “control”) must remain in the hands of the trust set up for benefit of the employees.
It is, nevertheless, still perfectly possible for individuals to hold minority stakes (or options over minority stakes) in up to 49% of the share capital. This might be desirable if it is considered essential to the retention of key personnel and ongoing progress.
(In practice, it is often appropriate for an Enterprise Management Incentives (EMI) share scheme to be established for one or more key staff immediately after the EOT’s acquisition of 100% of the company from the former owner.)
That former owner can continue to work in the business. They might typically play an important role in the governance of the business, in accordance with the new EOT constitution.
Funding the transaction is much the same as it might be within an MBO-style exit, involving the normal questions of;
- is there any cash already available in the company to assist with some initial consideration?
- do we want to borrow funds to enhance that initial payout?
- is the (former) owner content to schedule some of their proceeds of sale over a period of years?
The EOT structure has gained real traction in the relatively short time it has been available.
Many owners are pleased to leave their company in the control of employees who have helped them achieve their capital growth. They are enthused by the knowledge that the structure can be highly motivating for the team after sale (rather than the reverse, sometimes, after a trade sale to an unknown buyer). They like the tax-free bonuses potential for the whole workforce.
And yes, they are very unlikely to complain about zero CGT on their sale, as well!
If you would like to know more about this exit option and to understand how this might apply to you and your plans for your company, please get in touch with your relationship principal or email firstname.lastname@example.org to discuss.