While the current business climate may not appear welcoming for owners looking to exit, there are viable alternatives that offer significant advantages and sidestep some of the more challenging aspects of selling a business.
One highly favoured option in this regard is selling to an Employee Ownership Trust (EOT). An EOT represents an indirect form of employee ownership where a trust holds the controlling stake in a company on behalf of its employees. This approach also presents several compelling incentives for owners contemplating the sale of their controlling stake.
EOTs have seen a huge boost in popularity over the past year and there are now more than 1,400 employee-owned UK businesses – a 37 per cent increase from last year. Here are some of the key benefits of opting for an EOT sale:
One of the most pivotal benefits of an EOT sale for the seller is the opportunity to sell some or all of their shares to the trust while enjoying significant tax exemptions. Notably, the seller can benefit from a complete exemption from capital gains tax on profits generated from the sale of their controlling stake to the EOT. Additionally, there are typically no income or inheritance tax liabilities stemming from the disposal of the controlling interest. Furthermore, there exists an income tax exemption of £3,600 per tax year for certain employee bonuses. Although national insurance contributions are not exempt, this still translates into added remuneration for employees.
Beyond the aforementioned tax advantages, there are other compelling reasons to consider an EOT sale. Many business owners are drawn to the EOT option not solely due to the 0 per cent tax benefit but because they perceive it as the right choice for their team, as well as for themselves. This approach allows for a seamless transition by passing the reins to a trusted team within the company, rather than selling to a rival firm. Additionally, it facilitates the seller's ability to remain involved for a transitional period, ensuring a smooth handover.
The structure of an EOT sale helps circumvent the complications often associated with traditional sales. In an EOT sale, employees can acquire a controlling stake without utilising their own funds, as company profits contribute to the EOT, which is gradually used to repay the previous shareholders. Moreover, an independent party typically assesses the company's valuation in an EOT sale, reducing protracted negotiations between the seller and potential buyer and ensuring that the seller receives full market value for their shares.
While there are clear advantages to an EOT sale, it is crucial to be aware of potential challenges in the process and take precautions accordingly:
Since the deal depends on future company profits, a realistic valuation is attainable. If you seek a higher selling price, it may be advisable to explore other avenues.
Prepare for Contingencies:
Receiving compensation based on projected future profits carries risks. If the company encounters difficulties after your exit, it could impact the EOT and your payment. Conversely, if the company's profits surge in the future, the agreed-upon price may not reflect your contribution. Including an anti-embarrassment clause in the contract can safeguard against such scenarios.
Adherence to Regulations:
While tax exemptions make an employee ownership sale cost-effective, there are "disqualifying events" that, if they occur in the tax year following the sale, can lead to substantial capital gains tax liabilities. These events encompass the company ceasing trading, the EOT failing to meet employee benefit or controlling interest criteria, breaches of limited participation requirements, and non-compliance with trust rules. It's essential to approach an EOT sale with caution, especially if your company faces financial challenges or insolvency risks, as the apparent tax benefits might become highly risky. Furthermore, strict rules govern EOT conduct, necessitating a rigorous approach to ensure trustworthiness among those involved and compliance with all requirements.