EOT (employee ownership trust): an inside perspective
EOT stands for Employee Ownership Trust—a government-backed initiative that provides business owners with a succession planning option where ownership is transferred to the employees.
EOTs are becoming an increasingly popular exit strategy for business owners, offering a quick and low-risk way to transition ownership while ensuring the long-term success and continuity of the business. With Capital Gains Tax incentives, it’s no wonder business owners are finding them an attractive exit strategy.
If you’re new to EOTs, you may want to start by understanding ‘What is an EOT?‘
But let’s look deeper into how they work and whether an EOT could be right for you and your business.
Here we explore EOTs from both an advisor and an insider’s perspective. We come from a dual angle of two companies who have been there and done it, and one (Initium) that also helps companies to transition.
We hosted a webinar on the very subject, exploring what it actually feels like to become an EOT. We’ll cover the key highlights right here for you. However, if you prefer to watch the EOT webinar you’ll get expert opinions, real case study perspectives, and Q&A.
This article covers:
- The short and long term benefits of an EOT
- How an EOT works
- Who EOTs are suitable for
A unique EOT perspective
Did you know that Initium is an employee ownership trust? It makes this a topic close to our hearts.
In our role as corporate advisors to business owners who are selling their businesses, we are fortunate enough to gain two unique perspectives on the subject:
- From having experienced the journey of becoming an EOT ourselves
- From having worked with clients throughout their EOT journey – seeing external perspectives on an EOT, versus the traditional business sale.
This puts us in an excellent position to share everything we know about EOTs. So let’s dive in.
What is an EOT?
Jonathan Dunn, CEO of Initium, explains, “An EOT transaction is similar to any other transaction. It’s just got a different type of buyer. That buyer is a Trust that the employees are beneficiaries of, making it a more straightforward transaction, as the buyer knows the business very well.
For the right businesses it is a really, really good way of finding a new owner for the business, that the current owners are most happy with.”
Why should you consider an EOT for your exit strategy?
One of the primary concerns for a business owner when looking to sell their business is ‘Who is going to buy my business?’ And ‘Will they treat it in a way that respects everything I’ve built into a business, are they going to integrate it and create an issue for the staff, how will they treat the staff?”
Business owners don’t always consider whether their employees could afford to buy their business in the early stages of their sale journey.
One of the great advantages of an EOT over other deal types is that you don’t run the risks that we have outlined above. You don’t risk upsetting the culture, which can happen when you are bought out by third parties.
And this is just one of the reasons making EOTs increasingly attractive.
They’re a safer bet.
Another benefit of an EOT is that the proceeds are favourable in terms of tax – Capital Gains Tax (CGT) relief on disposals to EOTs stands at 50 per cent.
EOT markets
Certain markets lend themselves very well to becoming an EOT. The EOA (Employee Ownership Association) publishes data covering EOT adoption by sector, which we can see below.
Talent-based businesses that you would expect, where their assets are their people, Professional Services companies are at the forefront of EOT adoption.
Manufacturing, Construction and Wholesale & Retail and ICT are all also big adopters of EOTs.
The EOA now has over 2000 members and is growing rapidly.
Is there a drawback to EOTs?
In a word, yes. As a seller, you don’t get access to all of your money on day one (although this can be a drawback of many types of business sale).
With an EOT the Trust buys the shares that are being sold ,and the business in turn funds the Trust. You can only therefore create a deposit with the money that the business has at the time the deal is done.
The seller needs to be confident that the business can, over time, create the profit to pay down the rest of what is owed to them.
This can put some sellers off an EOT.
A client’s perspective
A business owner having been through the transition to an EOT, Tom Cunningford of Optagon Group was approached by a large plc, interested in buying his business.
He says there are 3-4 big reasons behind his choice of exit strategy being an EOT rather than a private sale:
- The (Capital Gains) tax-free benefit left him 24% better off financially compared to selling privately.
- Comparing the EOT model against selling to the plc, there were big differences between the vision and values of his existing team culture and that of the interested buyer. Although the buyer promised no changes to an already profitable company, they had a UK subsidiary already. Tom was aware that if the market changed, there could be a possible merger of the UK businesses, which would have an impact on his business. Future potential changes to the market conditions could undo the promises made.
- Still passionate about the business, Tom could still see huge potential and wanted to see his company continue to do well in the market. The only way it could do that was to retain control of its own destiny, and the EOT model does that really nicely.
- Tom, not yet near retirement, still wanted a purpose, and felt he had more to give. Whilst no longer a majority shareholder, he know he could still offer value. When considering an EOT you need to consider the skill levels of your management team. His management team were brilliant but still quite young, having been brought through the company. With the EOT model Tom could continue to work with the team, offering them support and a smoother transition as he slowly started to step away from the business. Tom feels an EOT is a really healthy way of doing exiting for everyone involves.
Changing in mindset
There are also some smaller reasons, which for Tom is more fascinating:
Watching the changes in how the team behaved once they had become owners of the business was interesting. From switching lights off, to not having the heating on as much, every one of the owners felt accountable – like it was their money. To the extent that their first year as an EOT was their most profitable one to date.
That wasn’t market conditions. Nothing changed outside of the business, only inside the business. It was the thousands of small decisions made with a new mindset. A mindset of know it is your own money you are ultimately spending.
For Tom, this has been exciting to watch.
Another example is around the security for the employees of not worrying who the new owners are, or getting a new team of executive directors. EOTs provide continuity not just for the employees but for the whole supply chain, protecting your suppliers and customers. This delivered a really positive message around what Tom’s business stands for.
Summary
Along with the benefits of tax-free proceeds, de-risking the sale by selling your business to a team already passionate about it, and retaining the culture of your business, an EOT really flips the switch in mindset for the employees that become owners.
The number of businesses transitioning to an EOTs is growing by 20-30% per annum which demonstrated their popularity and is largely driven by the benefits outlined above.
And according to the EOA, most of their member EOTs see an increased productivity, becoming more profitable with the vested interest of their employees.
Overall, they offer an excellent succession plan for many.
But they aren’t for everyone. To get specialist advice and find out whether an EOT is right for you, contact Initium and speak to our business team who can help you to secure the right future for yourself. See what our Fellows have to say about life after their sale.