Selling to an Employee Ownership Trust (EOT)

Category: Helpful tips for SME's | Preparing to sell a business

Sat 11th July 2020

On 26th June, we celebrated Employee Ownership day in the UK. It was marked by a number of highly informative webinars organised by the Employee Ownership Association. The webinar recordings are available on the EOA website (link to https://employeeownership.co.uk/events/eo-day-2020/) along with a lot of must-read articles and information about how Employee Ownership works in practice.

Selling to an employee ownership trust is becoming an ever more popular way for SME business owners to exit, and for good reason. Whilst it is not a solution for all, it is worth considering the option if you are looking to exit your business.

So, is selling to an EOT suitable for your company and you? Here is a brief list of the Pros and Cons:

Pros:

  1. No need to go and find an external buyer – whether Trade or Private Equity
  2. Handover to known management and employees and leave a legacy for the long term
  3. Achieve a full value for your company based on an independent business valuation
  4. Zero Capital Gains Tax (CGT) on the proceeds of the sale to an EOT

Cons:

  1. You still need to address succession if you are in charge of day-to-day operations
  2. Proceeds from the sale are dependent on what the company can afford to pay and tend to be paid over a longer period of time
  3. Limitations on ownership and directors’ shareholding and management structure
  4. Potential complexity when taking strategic decisions and raising growth finance

Having a clear succession strategy and being able to identify the trustee board and management team who will take over the day to day running of your company is pretty much a prerequisite to a successful transfer to Employee Ownership.

A sale to a trade buyer or Private Equity firm will often attract a premium value and favourable deal structure with the majority of the consideration paid on completion and a relatively short earn-out period.

A sale to an EOT will be based on an independent business valuation and payment on completion will be aligned with the company’s balance sheet and ability to raise funds; likewise post-completion deferred payments will need to be aligned with expected future earnings. In both cases, the company must be able to afford the payments without impeding its ability to invest and grow.

Leaving a legacy and long term value for the employees is often a key driver for business owners selling to an EOT. This is typically a priority over and above valuation and a large payment on completion of a deal.

In considering your exit, you need to look at all the options. We have put together a comparison chart for the 3 main exit options:

  1. Sale to a trade buyer or Private Equity firm
  2. Sale to management via a Management Buy-Out (MBO)
  3. Sale to an Employee Ownership Trust (EOT)

According to the Employee Ownership Association, employee owned companies are statistically more likely to succeed through difficult economic times, and to thrive in good times. The government is clearly promoting this route with the incentive of zero CGT.

In our view, the decision to sell to an EOT is a matter of personal preference coupled with the attitude of your key employees to engaging in business ownership.

In considering your exit from your business, it is worth looking at all the options. Hornblower are well placed to provide independent advice on which route to take.

Contact us today to review all the options and whether selling to an EOT is right for you.

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