Wanting to Sell Your Business? Consider an EOT

Published in Norfolk Director Magazine, Autumn/Winter 2019
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By Peter Harrup, Partner, BDO LLP

If you own a trading company, you can now sell to an employee ownership trust (EOT), putting your business in the safe hands of your staff rather than a competitor.

Plus, if the employee ownership is structured correctly, there can be significant tax incentives for both the seller and the employees; for example, a sale at full market value can be free of capital gains tax.

Aiming to facilitate wider employee-ownership, an EOT is a special form of employee benefit trust introduced in 2014, to encourage more shareholders to set up a corporate structure like the John Lewis business model. As an incentive for owners, the Government introduced generous tax breaks to embolden shareholders to move to an employee-ownership model.

But, how does a sale to an EOT work?

A qualifying EOT will be established with a corporate as the trustee of the EOT (the Trustee Company).

The shareholders sell their shares to the Trustee Company under a share purchase agreement. Together they jointly engage a share valuation expert to value the company and determine the purchase price. On the sale of the shares, the purchase price will create a debt owed by the Trustee Company to the shareholders which will be left outstanding. The company can then use its future trading profits to make contributions to the EOT which will use these contributions to repay the outstanding purchase price that it owes to the shareholders.

What are the advantages of selling to an EOT?

·          There are substantial practical benefits associated with being owned by an EOT. As well as reduced absenteeism and greater employee engagement and commitment, there is a greater drive for innovation and improved business performance.

·          It allows employees to indirectly buy the company from its shareholders without them having to use their own funds, thereby creating an immediate purchaser and addressing succession issues.

·          Subject to independent valuation, shareholders can sell their shares for full market value.

·          No capital gains, income or inheritance tax liabilities should arise on the disposal of a controlling interest in a company to an EOT.

·          Not all shareholders are required to sell their shares to the EOT.

·          The directors can remain in-situ post-disposal and can continue to receive market-competitive remuneration packages.

·          The EOT is generally seen as a ‘friendlier purchaser’ which means the sale process may be quicker, with potentially lower fees.

·          Going forward companies controlled by EOTs can pay tax-free cash bonuses of up to £3,600 per employee per year.

There are some key qualifying conditions to consider which relate to trust property, the trading status of the company and the trustees retaining at least a 51 percent controlling interest in the company. Specialist advice should, therefore, be obtained to ensure all such conditions are met.

Wanting to Sell Your Business? Consider an EOT 1

BDO LLP has significant experience of advising business owners on the sale of their business to an EOT and can help you avoid some of the common pitfalls. For more information contact Peter Harrup at BDO’s Norwich office T: 01603 615914 E: peter.harrup@bdo.co.uk or visit bdo.co.uk
Twitter: @BDOEastAnglia

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