Considering an Employee Ownership Trust (EOT) is an amazing choice for UK business owners. This special way of selling your business is quite different from other options. Instead of selling to a big company that your employees don't know, you're giving ownership directly to the people who helped make your business successful.
The process might seem complicated at first, but it leads to something quite special. Your employees become the new owners of the company they've worked hard to build.
The Formal Handover: From Owner to Trust's Care
Once the independent valuation experts have meticulously completed their employee ownership trust valuations, and the agreed price for the company has received unanimous consent from all parties, the intricate legal mechanism of ownership transfer swiftly activates. This is far more than a simple agreement sealed with a handshake; it necessitates a comprehensive share purchase agreement. Imagine this as a detailed legal document, meticulously outlining every aspect of the sale. The company's shares, formerly your exclusive possession, are now formally and legally conveyed to the Employee Ownership Trust.
Meanwhile, the trust works as its own separate legal body. Sometimes it's set up like a business that a group of trustees runs. These trustees now have the key responsibility of making sure the company's work always helps every employee. Their main job involves protecting the company's future and sticking firmly to the basic ideas of employee ownership.
Under UK law, most of these trustees must be completely independent. This means they cannot be the former owners or have close ties with them. This basic rule helps make sure the trust truly works for all the staff, rather than just helping a small group of people.
Financing the Acquisition: A Novel Approach to Payment
Naturally, one might then ponder the crucial question: from where does the capital emerge to compensate the former owner? It is certainly not a scenario where the Employee Ownership Trust possesses an immediate, colossal cache of ready funds. In the vast majority of instances, the remuneration for the company is not disbursed in a single, lump-sum payment. Instead, the payment schedule is typically extended over a span of several years, perhaps five or even as long as seven. Experts usually call this payment structure "deferred consideration". In simple terms, the company pays for buying itself by using the money it will make in the future. The business uses its expected profits to make regular payments to the seller over time.
Consider it akin to a commercial property being steadily amortised through the rental income it consistently generates. The company persistently functions, generating sales, and accruing revenue. A calculated portion of these accruing profits is subsequently directed towards the EOT, which then deploys these funds to remunerate the previous owner. This innovative financial structure proves remarkably astute because it largely negates the immediate necessity for the company to secure an enormous upfront bank loan, a burden that could otherwise exert immense pressure on its financial stability. Nevertheless, occasionally, a financial institution might extend a loan either to the EOT directly or to the operating company itself. This money could then help make a bigger first payment to the seller. This would let the previous owner get some of their money earlier. This careful balance between upfront payments and payments made later is worked out precisely to keep the business financially strong.
Preserving Tax Benefits: Adhering to Key Stipulations
Setting up an Employee Ownership Trust (EOT) in the UK brings one major benefit that really stands out – the huge tax savings it offers. When a business owner decides to leave and sells their main share of the company to an EOT, they might not have to pay Capital Gains Tax on the money they receive from the sale.
This tax break can save owners thousands of pounds. Instead of giving a large chunk of their sale money to the government, they get to keep much more of what they've earned from building their business over the years. This represents an exceptionally valuable financial relief. However, these advantageous tax provisions are not automatic entitlements; they are contingent upon the EOT's continuous adherence to a series of stringent conditions.
For instance, the EOT must perpetually retain ownership of more than half of the company's shares and a controlling majority of its voting rights. What's more, companies must work for the good of all their staff on fair terms. This means that when a business decides to share its profits with workers through extra bonuses, it has to offer these payments fairly to everyone.
If you are not sure where to start, do get in touch with the financial services outsourcing and business valuations experts for advice.
