There is a new way of owning a business in town – the Employee Ownership Trust (EOT). Since its introduction in 2014 this is becoming an increasingly popular method of succession planning.
Having sold a majority stake of my business, Ovation Finance Ltd, to an EOT, I have seen its advantages – and challenges – first hand.
In short, the company sets up the EOT, which buys the shares. This creates a deferred consideration, which is repaid from the future profits of the business. The beneficiaries of the trust are the employees of the business.
Any profit above the annual payment of the consideration – and all the profit once the consideration is fully repaid – therefore goes to the employees. The owner gets out at a market value, and the employees get in without having to come up with the cash.
Capital gains tax
Among many advantages of this route, owners that sell their shares to an EOT (at minimum a controlling interest) will not pay capital gains tax on the proceeds. It is tempting, therefore, to spread the news to business owners focusing on this tax efficient element of disposal.
It is, however, a temptation that must be resisted.
Life in an EOT business is not like life in one that is privately owned. The transition to a business that is owned by an EOT must focus on company culture issues: collaborative decision making; employee engagement; developing the business purpose.
Employees and clients
The driver for using an EOT for succession planning must be to build a business that will last, and not just to save tax. This itself might stem from wanting to leave a legacy, and/or perhaps the desire to look after employees and clients.
But possibly the strongest reason to focus on creating a business with a long term future is the fact that it is the future profits that will be used to pay the owner their value of their shares!
Interest in the EOT as a method of succession is increasing massively. It is vital that accountants help spread this message with a focus on building long term businesses, and not just focus on tax breaks.