As we shared in our recent blog celebrating Employee Ownership Day, the popularity of Employee Ownership Trusts (EOTs) continues to rise. However, many business owners still aren’t aware of the many benefits, such as those covered in our EOT guide, and how an EOT implementation would play out in practice. Therefore, we’ll help explain this with the help of a fictional case study:
The Background & Objectives:
Gareth Northgate is the 100% shareholder of Three Lions Limited. He owes a lot of gratitude to his team that have helped him with some recent success. He’s looking to partially bow out of the business in the future, but he has certain preferences:
- He doesn’t want to sell to a competitor and wants to maintain the company’s independence.
- He wants to maintain the legacy, culture and values that he and his team have helped build.
- He wants to reward and protect his key employees.
- He wants to locate buyers that are willing to pay a fair price.
Fortunately for Gareth, his accountants are experts in advising on and implementing EOTs, so they discussed this option with him alongside the alternatives such as an MBO and a third-party sale. Following on from this, Gareth has chosen to press ahead with the implementation of an EOT…
The EOT Implementation:
For Gareth and The Three Lions:
- The Smart Accountants supported Gareth with arriving at a valuation of Three Lions Limited of £10m for the purpose of the transaction.
- Gareth sells the majority of his shares (75%) in Three Lions Limited to the newly set up Three Lions Employees Trust Limited, in exchange for some £1m cash held in the company and a debt of £6.5m. Gareth plans to retain the other 25% shareholding which represents his ongoing investment in and commitment to the business and its future.
- The £6.5m debt is intended to be paid back over a period of five to eight years, from the profits of Three Lions Limited.
- As Gareth has sold the majority of his shares, he will benefit from paying no capital gains tax on the consideration paid for his shares (providing the EOT stays in place for over a year).
- No financial contribution is required from any of Three Lion Limited’s employees. However, the company will be able to pay bonuses free from income tax of up to £3,600 per employee per year.
- Certain major decisions will still require Gareth’s consent (as seller) until the debt is repaid, and whilst he remains shares in the business.
- In addition, Gareth has taken on the role of a Trustee Director of the EOT’s Corporate Trustee, alongside John Pebbles, one of the employees, and a partner at The Smart Accountants as an independent trustee.
- The deal has been modelled on a prudent eight-year repayment schedule, however, overpayments can still be allowed, so if the company is able, the debt could be repaid sooner.
- The board of directors continues to set the strategy for Three Lions Limited and ultimately runs the company. However, the trust and trustee directors provide governance to ensure that the long-term interests of the employees are upheld through the financial performance of the company and with any major decisions that it takes.
The EOT Impact:
Thanks to the implementation of the EOT, employee engagement increased which led to increased productivity and innovation from the motivated workforce. Culture improved too, with employees feeling they have better leadership opportunities and a larger voice in the future of the business. For Gareth, his legacy with The Three Lions remains strong and the culture and values he instilled endured. Whilst this is a fictional case study, studies such as The Employee Ownership Effect have found similar results in other employee-owned businesses.
Fictional to Real:
Of course, this is a fictional case study and every EOT implementation will be tailored to the objectives of the business owners and the circumstances of the business and its employees. To understand more about whether an EOT could be beneficial for your business, download our EOT guide or contact us. Our experience with any exit planning is that it’s better to start planning for each eventuality as early as possible and our experts will be happy to speak to you even if you feel this could be years down the line.