Employee Ownership Trusts on the rise

Your Partner in Success: Leathes Prior Solicitors

This model, made famous by companies such as John Lewis and Mott MacDonald, is a specific type of discretionary trust set up for the benefit of employees.  The fundamental purpose of an EOT is to enable employees to own part, or all of the business they work for.

So why have EOTs become so popular?

There are a number of reasons, but the key reasons are as follows:

• EOTs provide an immediate purchaser and exit/succession plan, which may not have been available otherwise. This will apply, in particular, where the current owners have not been able to identify a suitable third-party buyer.
• If various conditions are met, the sale of shares is tax-free for the selling shareholders, saving up to 20%.
• Again, subject to various conditions having been met, employees may be entitled to a tax-free bonus of up to £3,600 through the EOT structure.
• When implemented correctly, EOTs can assist with recruitment, retention, and incentivisation of staff. By making employees stakeholders, they are more likely to feel invested in the success of the company.
• An EOT structure can preserve company values and culture, ensuring business continuity as the company continues to operate under broadly the same principles and personnel.

However, EOTs may not be appropriate for all businesses. As with any corporate structure, the decision to set up an EOT will need to be considered carefully, as will the aspirations of the outgoing shareholders and the management team who will continue to operate the business. There are also some key disadvantages to EOTs, such as being irrevocable, and strict criteria must be met for those involved to benefit from favourable tax treatment.

EOTs provide an alternative option to exit

Despite these challenges, EOTs are increasingly becoming a viable option for shareholders looking to exit where other options may not be available (such as a trade sale, IPO or management buyout).  As such, it is essential to consider all available options when planning for succession.

EOTs provide a compelling opportunity for businesses looking to transition ownership to employees. They offer a number of advantages, including tax benefits, staff retention, and the preservation of company culture. When considering succession planning, it is essential to explore all available options and work with experienced professionals to identify the best solution for your business.