The number of businesses transferring ownership to employees through Employee Ownership Trusts (EOTs) has jumped 27% to 542 over the past year* (year-end December 31), up from 428 the year before, shows a new study by Lubbock Fine, chartered accountants and business advisers.
The number of new EOTs has jumped 2,750% in five years, when there was just 19. The EOT model was set up by the Government a decade ago – in 2014 – to encourage greater employee ownership of businesses. In 2019, Richer Sounds owner Julian Richer passed his business over to employees in a high-profile example of the EOT model in action.
Mark Turner, Partner at Lubbock Fine, says: “The number of new EOTs has ballooned in recent years – many businesses obviously see EOTs as a very attractive option.”
Mark Turner argues that EOTs are becoming more popular with entrepreneurs looking to exit their business. EOTs enable owners to sell their shares to employees via a trust, normally for full market value and financed in part from future profits. This disposal does not incur income, capital gains tax (CGT) or inheritance tax liabilities – an advantage over other sales such as a private equity deal.
CGT raid in Labour Budget may make EOTs even more attractive to entrepreneurs
If CGT changes in the labour budget make private equity buyouts less attractive, EOTs are likely to become a crucial alternative.
Says Mark Turner: “If this Budget makes significant changes to our tax system, then EOTs will become an even more enticing alternative to private equity buyouts. Any CGT increase will likely accelerate the use of EOTs.”
“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.”
EOTs allow a business owner to exit their company while preserving its culture
The EOT model suits owners who want to reward long-standing employees for their hard work. Part of these benefits are financial – employees are offered a stake in the company which may well be profitable.
EOTs are also preferred by some business owner who want to preserve the company culture and fear that will change if they sell to an outside purchaser.
Says Mark Turner: “Entrepreneurs worried that selling their business to a private equity firm would lead to too dramatic a change at their business may find an EOT agreement suitable for them.”
“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.”
Employee Ownership Trust applications up 27% in a year as transferring businesses to employees becomes increasingly financially attractive
