Pros & Cons of an EOTEOT Guide

A guide to helping business owners understand both the benefits and potential drawbacks of selling their business to an Employee Ownership Trust

 

 

If it is an appropriate route, the sale at market value of a controlling business interest to an EOT is the most tax efficient exit strategy for shareholders.

The tax benefits of selling a business to an Employee Ownership Trust for retiring/exiting shareholders and employees are well documented.

We believe, however, that it is vital shareholders understand the whole picture of Employee Ownership Trusts, so that they can be confident this Government-backed exit strategy is right for them.

Pros and Cons of an EOT: Valuation

Pros: Full and fair market value based on independent valuation.

Cons: Price is certain but could be lower than that offered by a strategic trade buyer (if you can find them). Note though that exceptional prices from strategic buyers are relatively rare and apply to businesses with unique selling points.

 

 

Pros and Cons of an EOT: Your Legacy

Pros: Very appealing if you are keen for the business to continue ‘as is’ and you want to protect your legacy. The business can continue to run as before with a smooth transition from your direct ownership. Altruistic owners can feel very positive about giving back to their employees.

Cons: None

Pros and Cons of an EOT: Tax

Pros: Exiting shareholders will pay zero Capital Gains Tax on the sale, while employees can enjoy annual tax-free bonuses of up to £3,600.

Cons: None

Pros and Cons of an EOT: Structure

Pros: You can shape the deal to some extent (in line with meeting EOT qualifying conditions) to meet your objectives. You can also remain a minority shareholder and give direct shares or share options to key management.

Cons: Day 1 cash is restricted by cash and reserves on the balance sheet, and funds that can be raised from funders by the EOT. Deferred consideration generally makes up the remainder of the consideration and is paid over several years.

Visit our guide if you would like to learn more about how to set up an EOT.

Pros and Cons of an EOT: Employees

Pros: An EOT is a hugely beneficial route for the employees who become part of a shared ownership structure that they directly benefit from. The potential threat of redundancies from a trade buyer looking to cut costs is removed.

Cons: Generally, there are none, but they do need to ensure that, over time (through promotion or recruitment), there is a credible team that can run the business successfully once the owner fully retires.

Visit our guide to learn more about the Benefits of an Employee Ownership Trust for Employees and Employers.

Pros and Cons of an EOT: Confidentiality

Pros: With an EOT, there is no need to market the business for sale. The transaction can therefore remain confidential until well progressed and then employees can be introduced to the process.

Cons: None

Pros and Cons of an EOT: Certainty

Pros: An EOT will happen if the owner manager is content with the valuation and structure.

Once this has been agreed it is merely procedural to implement the new structure with very little prospect of difficulties given the EOT trustees are minded to complete the transaction for the benefits it brings to the employees.

It also removes the need to find a purchaser, and the potential for a late withdrawal or price renegotiation by a trade buyer.

Cons: None

How Shorts can help

A sale to an EOT should be considered carefully as part of a review of your exit planning options. The sale of an owner managed business is often an emotional as well as financial decision, and factors other than just valuation and tax are important.

Shorts is proud to be a member of the Employee Ownership Association, and we are here to guide you through every step of the EOT set up and sale process.

Whether you want to contextualise the pros and cons of an EOT for your own business or are seeking additional detailed advice that’s tailored to you, speak to our Corporate Finance team today to get started, or download our free EOT guide.