In recent years, there has been a significant surge in the number of businesses transferring ownership to employees through Employee Ownership Trusts (EOTs). The latest figures reveal a 27% rise in such transfers, bringing the total number of EOTs in the UK to 542 as of the end of last year. This marks a dramatic increase from the 428 recorded the previous year, underscoring the growing popularity of this ownership model.
The number of new EOTs has jumped 2,750% in five years, when there was just 19. Originally introduced by the UK Government in 2014, the EOT model has become an attractive option for business owners looking to exit their companies while retaining key aspects of their legacy, including company culture and employee wellbeing.
Why are EOTs becoming so popular?
The growing appeal of EOTs can be attributed to several factors, but one of the primary drivers is the financial advantage they offer compared to traditional sales methods. When business owners sell their shares to employees via an EOT, the transaction is generally tax-efficient. Crucially, EOTs allow for the sale of a business at full market value without the seller incurring income tax, capital gains tax (CGT), or inheritance tax liabilities—savings that are not typically available with private equity buyouts or other sale mechanisms.
With tax savings on the table, many entrepreneurs are finding EOTs to be an attractive alternative, particularly when they're looking to exit in a way that rewards loyal employees. The case of Richer Sounds, a high-profile business transferred to employees by founder Julian Richer in 2019, highlighted the benefits of the EOT model.
The Labour Budget and potential CGT changes
The upcoming Labour Budget could make EOTs even more attractive. Speculation about a potential CGT increase has led many to believe that private equity buyouts may become less appealing due to the higher tax burden on such transactions. In contrast, the tax advantages of EOTs would remain untouched, potentially accelerating their adoption as a preferred exit strategy for business owners.
Founders exiting their businesses should be open to looking at structuring their companies as an EOT – especially if they'd looking for an alternative to private equity.
Preserving company culture and rewarding employees
Beyond the financial advantages, EOTs also offer a unique opportunity for business owners to maintain the values and culture they've cultivated over years, or even decades, of hard work. Selling to a private equity firm or another external buyer often brings significant changes, not only in leadership but also in how the business operates on a day-to-day basis. For founders who are concerned about losing the identity of their company, EOTs provide a way to ensure continuity and reward employees with a direct stake in the future success of the business.
From an ESG perspective, business owners are often keen to help out the employees who helped them create value in their businesses by passing their company onto them. Aside from ESG concerns, a well-managed EOT handover can still prove to be a very advantageous way for a business owner to exit their business.
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