Selling a business to an Employee Ownership Trust

What you need to know

The sale of a trading company raises many challenges. Questions you may be asking include how to get the best price, how to reduce the tax burden, how to find the right purchaser and how to look after loyal employees, to list just a few.

There are a range of solutions to these challenges – including a trade sale or a private equity transaction. However, there is another solution worth considering – a sale to an Employee Ownership Trust (EOT). An EOT can enable you to sell your company tax free, while also providing a legacy for the benefit of employees.
While EOTs have been around for 10 years, it is only recently that they have grown in popularity.

Rothschild & Co works with entrepreneurs through the whole of their journey – from creation to sale and beyond – but we do not provide tax advice. If an EOT is of interest, we can introduce you to lawyers and tax advisers who can explain the rules to you in detail, and who can help you consider whether it is the right solution for you.

What is an Employee Ownership Trust?

At its simplest, an EOT is a trust created for your employees, to which you sell your company (in whole or in part) tax free. The company is then held for the benefit of the employees. There is, as explained below, flexibility on how and when the trust pays you.

A sale to an EOT provides a ‘feel good’ solution – you minimise your tax bills but also provide for the future of your business and its employees.

How does a sale to an EOT work?

To achieve the tax saving certain key rules must be followed:

• The sale must be of more than 50% of your trading company and the price may be at market value as determined by an independent valuer
• The sale price is paid to you in instalments either from reserves and future profits or via third party debt financing, which can enable you to receive part of the sale proceeds at completion of the sale
• The EOT must be for all your employees if they have worked for you for at least a year. An employee who owns 5% of your company cannot be included.
  
  

What are the advantages of an EOT?

A sale to an EOT can provide a market for your shares and ensure you achieve a fair value for your company, while avoiding the 20% capital gains tax which would apply to other sales.

You have the comfort that the future of your company is in a secure environment and that your employees will be motivated and provided for. In addition, the EOT can pay annual bonuses of up to £3,600 free of income tax to employees.

You also have flexibility, as you do not need to sell all your shares to the EOT, and you can continue to be involved in the management of the company.

What are the downsides of a sale to an EOT?

No sale is without risk. A sale to an EOT may mean that you get less of the sale price paid upfront and there may be a higher sale price available via other routes, such as a trade sale.

To the extent your sale consideration is not paid upfront, you are dependent on the company remaining profitable so that the EOT can pay you.

However, you can (if you wish) remain an employee or shareholder after the sale so you can keep an eye on the business. To be a success, an EOT requires key management to have brought into the new ownership structure. In addition, the tax-free status of the sale may be lost if certain conditions are broken in the following year.

Should I sell to an EOT?

You should take professional advice to ensure the best sale route for you, having regard to your objectives and all the circumstances. We work closely with our colleagues at Arrowpoint Advisory, who provide expert M&A advice to private and family companies and entrepreneurs, considering all potential exit options.

While the tax-free status of the sale can be attractive, you need to have in mind factors such as how the company will fund the purchase price, the opportunities offered by other purchasers and which route will give you the best price.

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