Employee Ownership: Value beyond tax benefits

Employee Ownership Trusts (EOTs) offer a unique alternative to traditional business sales, providing not only tax advantages but also a host of operational and cultural benefits. While tax considerations often play a role in motivating a transition to EO, they should not overshadow the broader advantages.

From reduced due diligence to enhanced employee engagement and legacy preservation, EOTs bring flexibility and long-term value to both the business and its stakeholders. In this blog, we delve into the many benefits of EOTs, the recent changes introduced in the Budget, and the importance of expert guidance to navigate this evolving landscape.
A transition to EO should not be purely tax driven. There are many other benefits to consider with an EOT.

Invasive and expensive due diligence is largely avoided with an EOT where only a modest level of due diligence work is usually considered necessary.

The current shareholder(s) can also largely design the EOT deal themselves (although as discussed further below, great care is needed in determining consideration) and remain as involved as they wish. After the sale, vendors cannot retain control, but they can remain influential and be remunerated for future work (in addition to exit proceeds), and potentially retain or obtain some shares.

Employees should become more galvanised, provided they are properly engaged with EO and the opportunities it provides them and the business. The culture of the business and the founder’s legacy may be better preserved, with the founder’s “spirit” often continuing after their exit.

The business may also become more successful because of greater employee retention, motivation, and ideas.
After a sale to an EOT, HM Revenue & Customs (“HMRC”) appear to accept that the value of the company for the purposes of tax employee equity plans (such as the tax favoured discretionary and Enterprise Management Incentive share option plan, or all employee plans like the Save As You Earn plan) will be suppressed by any debt owed to vendors, such that it can be a very attractive time to provide employees with options/shares. Former owners and family are not usually prohibited from partaking.

Of course, this is not an exhaustive list and there are also potential pitfalls to navigate. For example, care is needed to ensure the company can fund the exit proceeds and that all the EOT conditions are met at the date of sale and into the future. However, the key message here is that there is great flexibility with amailto:[email protected] EOT that may not be available with a management buy-in or buy-out or a sale to a third party. For more information, please head to www.mha.co.uk or contact [email protected]