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Guest Blog: Exploring business succession options

When planning for business succession, an Employee Ownership Trust (EOT) offers a compelling route that stands alongside third-party sales, management buyouts (MBOs), or even liquidation. In this article, Postlethwaite Solicitors highlights one of the fastest-growing business ownership models in the UK.

Employee Ownership (EO) is on the rise, with approximately 1,700 businesses across the UK—primarily SMEs—embracing this model. These businesses are experiencing significant benefits for owners, employees, and the broader economy. The employee-owned business (EOB) sector is currently growing at an impressive rate of 30% per annum, reflecting the increasing appeal of this ownership structure.

Why Consider an EOT?

For private company owners looking to retire, transitioning to an EOT presents significant advantages, particularly in the form of tax benefits:

  • Capital Gains Tax Relief: Owners who sell their shares to an EOT can do so without incurring capital gains tax.
  • Income Tax-Free Bonuses: Companies owned by an EOT can distribute annual bonuses to employees free of income tax (up to £3,600).

To benefit from these tax breaks, the following conditions must be met:

  • The EOT must acquire and maintain more than 50% ownership of the company’s shares.
  • Any income tax-free bonuses must be distributed equally among all employees under the same terms (this applies to any shares or cash transferred from the EOT to employees).
  • The company must be a trading entity, not an investment vehicle.
  • The company must maintain a reasonable balance between the number of employees and shareholders.

The EO model empowers the very people who understand the business best—its employees. Reports suggest that employee-owned businesses drive productivity levels 8-12% higher than their non-employee-owned counterparts. This productivity boost, coupled with enhanced employee engagement, often leads to improved business performance and innovation.

Preserving Independence and Culture

Selling to an EOT allows founders to unlock the value of their company while preserving its independence. This approach is particularly appealing for those who wish to maintain the company’s culture and values, ensuring that employees have a bright future. Many retiring owners find comfort in knowing that much of their company’s success stems from the dedication and talent of their team, and that the EO model will continue to foster this environment.

How is an EOT Funded?

Typically, an EOT will acquire a controlling interest in the company from its current shareholders. The purchase price, which is determined through an independent valuation, must not exceed the market value. Payment is usually made in instalments, with several funding options available:

  • Profit Funding: The EOT is often funded by the company’s future profits, following an initial down payment from current profits.
  • Financing Options: As EOTs become more popular, a growing number of financial providers offer tailored financing solutions for these transactions.

Who Manages the EOT?

An EOT is overseen by its trustees, who are responsible for ensuring the company is well-led, with a focus on maximising employee engagement and commitment. However, the day-to-day management of the company remains with the existing leadership team. In some cases, an employee council may be established to further facilitate communication and engagement within the company.

By transitioning to employee ownership, business owners can secure the future of their company in a way that honours its legacy while providing employees with a sense of ownership and commitment to the business’s long-term success.

For more insights into how EOTs work, watch our explainer video or visit our EOT page.

About Postlethwaite Solicitors

Postlethwaite Solicitors is a boutique law firm specialising in employee ownership and employee share schemes for over twenty years and who are, themselves 100% employee-owned. Regulated by the Solicitors Regulation Authority (SRA), and with top firm and lawyer rankings for several consecutive years with Law Guides, Chambers & Partners and Legal 500, you can be sure you’re making the right decision when choosing to work with Postlethwaite Solicitors.

For contact details and to find out more, please visit their website or contact us.