To EOT or not to EOT? | A popular alternative to trade sales

To EOT or not to EOT? | A popular alternative to trade sales

The popularity of Employee Ownership Trusts (EOTs) has been increasing as a growing number of business owners’ express concerns about trade sales, in particular the lack of privacy, the time required for the bidding and due diligence and the potential for a ‘price chip’ late in the deal process.

The trade sale or MBO have been the dominant models for business owners wishing to exit and seeking to maximise the value in their business. However, whilst trade sales can often realise the best financial return, an increasing number of owners are reluctant to engage with potential trade buyers, especially if they are competitors. Owners and shareholders value privacy and want to remove uncertainty from the transaction by shaping the deal and preserving a legacy for their staff and the community.

Employee Ownership Trusts (EOTs) offer an attractive exit option for helping with retirement planning. Employee Ownership has long been a secondary exit option but a surge in popularity during the last four years can be clearly linked to owners’ desires to see continuity of the company and the culture they have developed over many years.

From a financial perspective, EOTs offer several funding options including cash at completion, ‘self-financing’ from future profits and external debt funding. EOTs are also attractive from a tax perspective, as the owners can bank a 0% tax rate on the sale. The structure needs to ensure that it does not put undue financial stress on the new employee owners and gives them the time and space to grow and develop the business.

Changes to Capital Gains Taxes and business asset property tax relief, formerly known as Entrepreneurs Relief, are likely during 2022. Although 2021 may end up being a ‘window’ in which owners can sell their business at known rates of Capital Gains Taxes (CGT), it is not dampening interest in EOTs, in fact quite the reverse. Back in 2019, shareholders were often dubious about EOTs when they were raised as an exit option, but now are being proactively sought after as a model.

For more information regarding EOTs, including how they work, the benefits and the areas to consider, please click here.

How can Azets help?

Around half of the EOT deals on which Azets are advising, the business owners have already considered a trade sale, or a trade sale has stalled or simply been aborted. Employee Ownership Trusts have matured into a viable and often preferred exit option, and we would encourage more business owners to ensure to consider them when drawing up their exit plans.

If you feel the idea of collective ownership might suit the ethos of your business, or would like further information on any of the areas raised above, please contact a member of our Tax or Corporate Finance teams, or get in touch with your local Azets contact. 

We can provide advice across the full range of key areas such as taxation, independent valuations, funding options and practical transactional support.