Simon Blake
Partner
Employee Ownership Trusts (EOT) Services
Transferring business control to the employees
Price Bailey, there to advise from the start
Employee Ownership Trusts (EOTs) continue to grow in popularity due to the benefits they deliver to current owners, employees and Company growth prospects.
An EOT ensures that the right succession plan is in place that reflects your values and fosters long-term stability for your company.
If your business has good future prospects, but the current shareholders want to realise some capital value now with a significant tax benefit, then an EOT will often be considered as an ideal solution.
EOTs provide a pathway to transitioning ownership, capital payments, day-to-day management and strategic leadership on timelines that can be aligned, or even separate. This provides all parties with opportunity and flexibility.
Our credentials
Price Bailey have advised on 20+ EOTs in recent years. These have varied in size from small businesses worth around £3m to businesses worth in excess of £100m.
Several of our Partners are also Trustees of EOT Companies – so it is a space we know very well.
We have layered in complexity where necessary, considered detailed Inheritance Tax (IHT) requirements, worked with an array of lawyers and have unpicked and fixed other advisor’s processes too.
Some of our EOTs have been undertaken very quickly; 8 weeks is the quickest, though we would not recommend this! Others have been carefully designed and planned for over a year.
Benefits for all
EOTs offer advantages for owners, employees, and the business alike. A few key benefits that make EOTs a compelling option for succession planning and exiting a business include:
- Eliminating the need for a third party sale
An EOT lets you transfer ownership without the need to find an external buyer.
- A flexible transition
The day-to-day running of the business does not need to be overhauled immediately and can evolve gradually at a pace suited to all parties involved.
- Tax-free bonus potential
Employees may receive up to £3,600 annually in largely tax-free bonuses.
When an owner-manager sells the business to an EOT, they do not pay any CGT on an eligible transaction that is cleared by HMRC.
- Blending with share options
The deal can also be blended with share options to incentivise second tier management, though these might affect eligibility for certain employee ownership benefits.
Additionally, owner-managers do not have to sell their entire stake in the company. As long as the EOT holds over 50% of the share capital, you may wish to retain an interest in the business.
Rising popularity of EOTs
Since the UK introduced EOT legislation a decade ago, their popularity has surged. Their versatility makes them suitable for businesses across a wide range of sectors, especially those with people-oriented operations. If you are considering an EOT, your industry need not be a barrier.
To establish an EOT, a business must meet certain requirements. These include:
- The company must either be a trading company or trading group.
- The Trust owns more than 50% of the share capital at all times.
- All employees must benefit from the scheme, although exclusions can apply.
- All employees must be treated equally, though there is the opportunity for some tiering by factors such as hours worked or earnings bandings to a limited extent.
Further considerations include the requirement for at least 12 full-time employees, not including option holders, family members, shareholders, or contractors, with a minimum one-year employment prior to completion.
“We believe that exiting the business via EOT will make the company more resilient, bring employees closer together, strengthen our shared ethos, and allow a group vision. Having just celebrated the 10th birthday of the company, the EOT marks the start of a new chapter and Jonny and I are very excited to see what the future has in store. We want to thank Eleanor, Simon and the team at Price Bailey in supporting us in this exciting development for the business.
David Lamb, Applied Psychologies
Support throughout the whole process
At Price Bailey, we work alongside you from start to finish and beyond, ensuring a smooth transition process and continued support after completion.
With multiple phases and intricate components, the EOT transfer of ownership requires a well-coordinated approach, with many different steps and departments involved. However, we have created a very brief overview of each stage below:
Phase 1: Qualification, valuation and modelling
The initial phase involves a thorough evaluation of your business’s suitability for an EOT, ensuring financial reporting meets the long-term obligations of an EOT. We will comment on this within the HMRC clearance letter.
Simultaneously, our experts develop a comprehensive, long-term forecast built around your management teams’ assumptions. This dynamic tool enables you to test various scenarios, ensuring a well-informed decision-making process. This supports our clearance letter to demonstrate to HMRC that we understand how the business intends to generate cash in the future and what the use of that cash will be in different scenarios.
Finally in this phase, we then undertake a valuation to understand what that the business is likely to be worth in different scenarios.
Phase 2: Deal planning
Deal planning involves bringing all of the initial work together to determine how exactly a deal will work, what it will return to the different parties, where the risks are and who will benefit and when. The outcome is clarity on what gets paid to who and when in different scenarios and how the balances change over time.
This is normally where additional complexity is added should it be required and necessary. This complexity can arise from matters such as de-merging non-operating property, share splits, IHT planning, share options, family matters, raising finance if required.
Phase 3: Legal drafting and HMRC clearance
Our team introduces you to relevant and experienced EOT lawyers. We will agree the outline drafting and terms. We will also prepare written tax reports, and submit clearance to HMRC, including statutory and non-statutory applications. As part of clearance, we provide a valuation letter in full alongside the valuation workbook.
During this time, or before, the Trust may also take its own legal advice.
Phase 4: Completion
Prior to completion the Trust Co. needs to be formed, trustees appointed and the legal documentation completed. We assist yourselves and the lawyers on these matters as required. During this time, should there have been any complexity added we will also be working on those tasks.
Once Clearance is through on the final legal documents, we finalise the valuation and any loan or financing documentation.
Everyone is then ready to Complete the sale of the business and the Trustees are then briefed on the details prior to signing the Transfer of Ownership.
Funds then flow according to a schedule we produce.
Upon completion, we make submissions to Companies House and HMRC, support you with initial corporate governance for the EOT, review Trust accounts and register the Trust with HMRC.
Phase 5: The first year
The 12 months that follow will have a few ‘firsts’ including Trust meetings and Employee Bonus payments. The vendors may want advice on their tax returns too. Your management accounts may change and your pre-year budget meetings may have another few agenda items. We provide all of this support and stick with the Trust Co. board throughout that first year.
Our thorough process ensures that the transaction is smooth, you and your employees feel supported and that your Company is primed for success in the long-term.
Multi-departmental advice
One of the unique advantages of working with Price Bailey for your EOT transaction is the access you gain to multiple specialists, each contributing valuable expertise.
We can assist with associated matters in either a ‘guiding’ capacity where we help your existing providers, or an execution capacity if required.
We offer a helpdesk to cover all of the matters below for the first year after completion:
- Making the management accounts appropriate for an EOT
- Personal tax
- Payroll matters for the EO bonus
- Accounts prep and filing
- Cash flow modelling
- Board meeting governance
- Supporting with capital distribution governance
- Future share options matters
- Funding matters
- IHT and family tax matters
EOT Frequently Asked Questions
Why do I need a valuation for an EOT?
A fair value, robust valuation is essential for selling to the EOT. Our team leverages extensive valuation experience, using multiple leading databases to ensure accurate, well-supported valuations.
How much will I get paid?
This is dependent on detailed cash flow modelling which is completed as part of our engagement. We are accurate in describing what this looks like in different scenarios and these expectations are understood by everyone involved in the process, including trustees.
What if my employees aren’t ready?
We can support the sellers and Trustees to create a succession plan to help transition management responsibilities. If required, we can also include share option schemes as part of the EOT transaction to help further incentivise the transition of responsibility. Day-to-day management doesn’t need to change immediately, allowing for a flexible adjustment period which can be up to 10 years in many cases.
How long does the process take?
The typical timeline is around 16 weeks. If third-party debt is required, this can extend by several months, though we also accommodate accelerated timelines when necessary.
Are there misconceptions about EOTs?
We have found that there are many misconceptions regarding EOTs. The most common ones include:
- The day-to day management will change immediately: This is not true as the pace of transition can be adapted to your management team’s readiness.
- There is an employee council requirement: An employee council isn’t mandatory, and the vast majority of EOTs do not have an employee council.
- CGT exemption permanence: There is a common misconception that upon selling to an EOT CGT is not payable, ever. However, the CGT liability rolls on to the Trust after the fourth anniversary of the tax year.
- The Trust control day-to-day operations: The Trust has a defined number of consent rights where it can exercise decision making power. However, these are limited and agreed by both parties prior to completion. Day-to-day management continues to be run at the trading company level, not the Trust level.
The long-term impact of EOTs on business success
Though the data on EOTs is still developing, initial findings indicate positive outcomes. As the Company’s responsibility transitions to employees, momentum builds, driven by both shared responsibility and economic benefit. An EOT’s success aligns with the company’s performance, creating a sustainable and rewarding foundation for the future.
Why choose Price Bailey?
Our EOT credentials speak volumes. We manage 2-4 EOT cases concurrently, including straightforward transitions and complex transactions exceeding £100 million. We can tie in practical matters that sellers face including IHT and Income Tax advice, but also practical matters that your Company will face including payroll processing and advice regarding filing Trust accounts and management accounts. Our Helpdesk is available to independent Trustees, while our valuation expertise is backed by world-class data sources to help create robust submissions to HMRC.
We can help
Contact us today to find out more about how we can help you
