Today (23rd June) marks the 11th annual EO (Employee Ownership) Day which celebrates and aims to raise awareness of the benefits that can come from employee ownership. As whilst it’s an area that has been growing in recent years, many business owners still aren’t aware that employee ownership can offer an alternative exit route for them.
Therefore, in this blog, we’ll explain what we mean by Employee Ownership and Employee Ownership Trusts (EOTs), explore the latest statistics released by The Employee Ownership Association and look at why employee ownership can be so beneficial for the stakeholders it can involve.
Employee Ownership Trusts (EOTs) Explained:
Starting with the fundamentals – an Employee Ownership Trust (EOT) refers to a unique kind of trust where the majority ownership of a company can be sold by the seller(s). In this arrangement, the assets, typically the shares of the trading company, are held by the trust for the benefit of the present and future employees, hence the term ‘employee-owned’. This is a very simplified explanation, however, so please download our more comprehensive EOT guide that explains this along with the benefits in more detail.
EOTs in Numbers:
In 2021, 285 businesses transitioned to employee-owned, which was a record number at the time. However, today as part of EO Day, The Employee Ownership Association (EOA) has released their latest statistics:
- 2022 alone saw 332 businesses transition to employee-owned which was a record year in terms of new EO businesses.
- For comparison, 2021 which was also a record year at the time saw 285 companies transition to EO.
- Overall, between 2020 to 2022 the employee-owned sector has more than doubled in size to over 1,000 EO businesses.
- As at June 2023, the total EO businesses to 1,418. This represented a huge 37% growth for the year.
Whilst businesses across a wide variety of industries and business models have transitioned to employee-owned, there are some industries that favour this exit method more. In the latest statistics, The EOA found the top 5 sectors embracing the employee-owned model were:
- Professional Services (39.1%)
- Construction (15.1%)
- Manufacturing (13.6%)
- Wholesale and Retail (11.4%)
- Information & Communication (8.1%)
Why Go the EO Way?
The increasing popularity of EOTs can be attributed to a multitude of factors. For sellers, the benefits include a fair price for their sale, no need for an external buyer search, and the opportunity to uphold the company culture, values, and their own legacy. Providing conditions are met, the consideration received on the sale of shares to an EOT will also not attract any capital gains tax.
Employees, on the other hand, stand to gain a financial reward without any personal investment (as you might see with a Management Buyout) and without the need for an exit to realise this reward. With an EOT, employees can effectively share in the profits of the business and can earn a £3,600 bonus each year income tax-free.
For a more detailed understanding of the benefits not just for the seller(s) and employees, download our EOT guide here.
Government Consultation on Effectiveness of EOTs:
It should be noted that alongside this surge in popularity, there is currently a HMRC consultation that’s looking “to ensure that the reliefs are closely targeted at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning.”.
At The Smart Accountants, we’ve helped support various businesses in implementing genuine EOTs that are to the benefit of all stakeholders including the employees, company and wider community, rather than solely for tax relief purposes. As a result, we welcome this review and await the full consultation to be published later this year.
Choosing EOT as an exit strategy for your business requires careful consideration and depends on multiple factors that are bespoke to your business. Therefore, it’s important to discuss this with an EOT expert. If you would like to discuss whether transitioning to employee owned could be a viable option for you please, please get in touch.
Download Our EOT Guide: