Exit Considerations
Employee Ownership Trust
An Employee Ownership Trust (EOT) is a form of exit strategy that is becoming increasingly popular with business owners. With an EOT, a company is sold to a trust, which then holds the shares on behalf of the employees. This can provide a number of benefits but also has some potential downsides.
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Overall, an EOT can be a viable exit strategy for business owners who wish to retire or move on, especially if they're keen to preserve the culture and independence of the company. But like all business decisions, it's important to weigh the potential benefits against the possible downsides before moving forward.
Benefits & Disadvantages
Tax Benefits:
One of the biggest attractions of the EOT is the tax advantages it offers. In the UK, for example, sellers who meet certain criteria can sell their shares to an EOT free of Capital Gains Tax. Additionally, bonus payments made to employees from the trust are exempt from income tax, up to a certain limit per year.
Succession Planning:
EOTs can provide a smooth transition of ownership, without the need for an outside buyer. This can be beneficial for businesses where the existing management team may not be in a position to buy the company or where the owner wants to ensure the business remains independent.
Employee Engagement and Retention:
Employee ownership can help to foster a culture of participation and responsibility, which can lead to improved employee engagement, morale, and productivity. Employees often feel more invested in the success of the company if they have a stake in it.
Business Continuity:
Unlike a traditional sale, where the company may be absorbed into another business, an EOT allows the business to continue operating as it always has, preserving its identity and culture.
Potential for Lower Sale Price:
The sale price in an EOT transaction may be lower than what could be achieved in an open market sale. The valuation must be justifiable and fair to all parties involved, meaning owners may not get as much as they might from a third-party buyer.
Complexity and Cost:
Setting up an EOT can be complex and costly, with legal and professional fees involved. There can also be ongoing administrative costs to maintain the trust.
Lack of Immediate Pay out:
Sellers may not receive all of the proceeds from the sale immediately. Typically, the sale is financed by future company profits, so the seller receives payments over time.
Risk of Business Performance:
Since the pay out to the seller is typically tied to future profits, there's a risk if the business doesn't perform as expected. The seller bears this risk.
Lack of Control:
Once the business is sold to an EOT, the seller loses control over the business. Decisions are made by the trustees, who are supposed to act in the best interests of the employees.
Employee Conflict:
While employee ownership can increase engagement, it can also lead to conflicts. Not all employees may agree with the decisions made by the trust, which can lead to internal disputes.