What is an EOT?
An Employee Ownership Trust is a relatively simple way for a company to become employee owned and is far simpler to manage than allocating all the shares to employees individually.
An Employee Ownership Trust owns shares on behalf of all the employees and is overseen by Trustees who look after their interests.
Typically, an Employee Ownership Trust will acquire a majority shareholding. More than 50% of a company and then hold those shares for the benefit of the employees. The structure was introduced by the UK Government in 2014 to encourage the growth of employee owned companies and, provided the EOT holds more than 50% of shares and meets a few simple rules, it offers two significant tax breaks:
The seller can sell their shares free of Capital Gains Tax
Income tax-free bonuses can be paid to staff up to the value of £3,600 per annum
Some well-known companies, such as John Lewis Partnership and the Arup Group, are owned by Trusts. Since 2014, a growing number of companies are becoming majority owned by an Employee Ownership Trust with some of the most well-known ones including Aardman Animations, the company behind Wallace and Gromit, Cwmni Da, one of Wales leading TV production companies and Riverford Organics, a leading organic food supplier.
How does an Employee Ownership Trust work?
This is the simplest form of employee ownership to manage because it avoids the need for each employee to have their own personal shareholding.
Usually, an Employee Ownership Trust will gain a controlling interest in a firm from its current shareholders. After an independent assessment is made, a price will be agreed which aligns with the current market value. Sometimes an external loan is arranged to allow the price to be paid in one go. But, more often, the payment will be made by instalments with the Employment Ownership Trust being funded by the company from its future profits. In some cases, a company owner might gift their shares to the Employment Ownership Trust but usually they will want to be paid market value.
Whilst decision making is still the responsibility of the board of directors and a management team as in any other company, all major decisions affecting shareholders, such as appointing directors and deciding on a company sale, are referred to the Trust. The Trust, therefore, acts as a coherent buffer, sounding board and communication channel between the directors and employees.
An employee joining a company automatically becomes a co-owner by becoming a beneficiary of the trust and if they leave, their ownership automatically ceases. There is no need to issue shares to joiners and buy them back from leavers or from continuing employees who wish to sell. But if you feel individual share ownership will work better for some employees in your company, your Employee Ownership Trust could transfer some of its shares to employees directly. Employee Ownership Trusts can be used alongside other approaches to incentivisation such as Executive Management Incentive (EMI) schemes.
Why consider an Employee Ownership Trust?
Employee owned companies tend to enjoy several advantages including greater productivity and resilience. With an employee ownership sale, the price will often be set at a fair market value, so the owners will quickly know exactly how much they will receive from the sale, providing certainty. Also, many company owners retire by transferring ownership to their employees via an Employee Owned Trust because they believe their company will be more successful compared to selling it to a third party. And some entrepreneurs introduce employee ownership right from the start because they see it as key to maximum long-term success.
Selling a business can be a challenging process which can cause damage if not handled correctly. Selling a business this way can allow for a gradual, carefully managed process, without having to involve any external parties. Often the selling owners will retain a percentage of ownership and take a reduced role. This can result in a smooth and stable transition with the outgoing owners’ experience and expertise still available to the business.