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22 January 2021

Employee Ownership Trusts Increasing in Popularity


With 2020 behind us, the impacts of the COVID-19 Pandemic and Brexit are still being felt throughout the economy, and will no doubt continue to cast a cloud of uncertainty for a good while yet. 

Businesses and business owners find themselves in a state of flux, not quite knowing which way to turn as circumstances continue to evolve so rapidly.

A traditional sale to an aligned trade purchaser or private equity investor may still be appropriate to many business owners seeking to exit in uncertain times, the long lasting effects of Covid-19 are likely to give rise to an increase in protracted commercial negotiations over company valuations, particularly if trading performance for 2020/21 have been supressed for a long period of time, and the scarcity of potential purchasers who are fair and commercial, rather than those seeking a potential bargain or reasons to de-risk the deal. However, if the thought of going at it for another three to five years is even lower down the list, there are other alternatives available to an owner looking for a different way to hand over the mantle

The advent of Employee Ownership Trusts (EOTs) in September 2014 has opened the door to many owners searching for alternative succession plans, creating a framework for greater employee engagement, and participation in the upside of future success.

Castle Corporate Finance have helped a number of owners and management teams through the process of a sale of shares to an Employee Ownership Trust, enabling not only succession for founders, but also allowing companies to manage and implement ambitious growth plans. The evidence to date indicates a significant increase in productivity within employee owned businesses – perhaps another factor contributing to their increasing popularity.

“Employment Ownership Trusts are not the answer for everyone but offer a distinct path for many owners or founders who may have explored traditional exit routes without success, and who may not be aware of the existence or the potential benefits of an EOT. The number of employee-owned businesses is rising rapidly, and we expect that trend to continue in the coming year as founders seek to de-risk, and management teams seek ways to involve their workforce in the running of the company.” said Victoria Ansell, director at Castle Corporate Finance.

One of the other substantial benefits for sellers is also the generous tax break on this form of exit which currently exists, in the form of 0% capital gains tax on the proceeds of sale, provided the transaction complies with the legislative framework. Employees could also gain a tax-free cash bonus of up to £3,600 per employee per year.

Knowing who to turn to for advice is the important first step for any business owner looking to explore the options available to them. An EOT could be the right solution but there are important criteria and conditions to be met.

“Castle can initially help to assess the feasibility of an EOT, firstly as an exit strategy for the current owner(s), but secondly as to whether it is a viable framework for the company itself as one looks to the future. We can help to assemble (and project manage) an experienced team of professionals to support sellers and the trustees of the EOT alike, covering valuation, taxation, and legal aspects, and drawing all those strands together. Finally, by supporting shareholders or management when presenting the EOT to employees: helping to ensure that transition to employee ownership gets off on the right foot from the beginning is vital.” Victoria said.

Employee-owned businesses in themselves are not new and business models of shared ownership have been around in one form or another for over a century. However, this model is less than ten years old, and many are still not aware of it. Castle Corporate Finance believe it should form part of any discussion around succession plans, and particularly at this time the EOT framework could be a lifeline to some business owners who want to share the success of their businesses with their employees.

 



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