An Employee Ownership Trust, or EOT, is a specific form of management buy-out (MBO) that, essentially, places a business’ direction in the hands of its staff via joint shareholding. This relatively new form of ownership structure was introduced as an unassuming entry in the government’s 2014 Finance Act legislation, with the aim of enabling new businesses to capitalise on the success of an employee ownership model popularised by major retailer John Lewis.
In brief, a controlling majority of a business’ shares are sold to a trust that operates on behalf of the staff in a business. There are numerous reasons for which a business might consider an EOT over more conventional forms of business sale. For one, there are unique tax-related benefits a business owner can enjoy by selling to an EOT.
For another, a business’ owner may wish to secure the longevity of their business, through trusting its growth and direction to their employees. Information gathered by the Employee Ownership Association indicates that the top performers amongst employee-owned organisations outperform conventionally-owned businesses in terms of both profit and productivity – with productivity triple the average in some cases.
Whatever the reasons a business owner may have to opt for an EOT over another form of business sale, there are still numerous questions surrounding the system and sale process. These are some of the more common questions asked about EOTs, with key answers for those considering a different future for their business.
Are EOTs Difficult?
The most common question asked by business owners on the verge of sale relates to the difficulty of an EOT sale. Selling your business to an Employee Ownership Trust is no more difficult than any other form of business sale, though there is a unique process to follow in order to complete the sale.
The sale is financed by a third party or through distributable reserves, and a corporate trust acts on behalf of the business’ staff cohort as the buyer in the transaction. There are also criteria that the business must meet in order to legally carry out an EOT, that guarantee the sale of over 50% of a business’ shares, and secure employee remuneration as part of the scheme.
Are Businesses Typically Sold to EOTs Below Market Value?
Another question echoes concerns that certain kinds of business sale can effectively diminish the value of said sale. In short, selling a business to an EOT does not result in a sale below the business’ market value. The sale does not depend on the individual financial situations of each employee, nor are discounts expected for such a sale; rather, the sale is between the owner and a corporate trust, and treated equivalent to any other transaction.
In essence, if a business is sold to an EOT below market value, that would a decision made by the seller. It is otherwise necessary for the business to be sold at market value, so as for shareholders to make the most of the tax incentives provided by the sale of shares to the trust.
Are EOT Sales Less Agile, on Account of Administration?
The sale of a business to an EOT conjures, for many, the image of stacks of paperwork and months of red tape before successful clearance. While it is true that there is an administrative element to the creation of an employee trust, this administration is relatively simple to manage.
The majority of this administration lies in the setting-up of channels for more direct employee engagement, and the administration of a method for tracking legally protected employee benefits. There is also a modicum of administration involved where shares are split between multiple shareholders; the business must guarantee the sale of over 50% of available shares, requiring potential liaison and legal agreement with international partners.
Are EOT Sales Employee-Led?
Lastly, there is a fundamental misconception that can often colour a business leader’s overall view of the Employee Ownership Trust model. While EOTs enable collective ownership of a business and its future direction, that business is not directly controlled by the employees – nor is the sale managed directly by employees.
A trustee is placed in charge of the trust, who is also responsible for overseeing the transaction and the correct administration of employee benefits. Funding comes from financing and not from individual employees, distinguishing an EOT from a conventional MBO. Trustees act on behalf of the employee collective, and interpret employee input.