Empowered employees, engaged businesses: A dive into Employee Ownership Trusts (EOTs)

A feature by Alistair Aird, Corporate Finance Director at Carpenter Box.

Imagine a world where employees aren’t just cogs in the machine but invested stakeholders in the company’s success. Where their voices are heard, their contributions valued and their efforts directly tied to the bottom line. This isn’t a utopian fantasy; it’s the real-world goal of Employee Ownership Trusts (EOTs), a unique model gaining traction. In the UK, EOTs now represent 1 in 20 of all private company sales and the number is growing rapidly.

What is an EOT?

An EOT is a special trust established to hold shares in a company on behalf of its employees. It acts as a collective pot, acquiring shares from existing owners and holding them for the benefit of all current and future employees. Think of it as a democratic shareholding platform, where employees don’t need to individually invest, but are still able to reap the rewards of ownership collectively.

Benefits for everyone: A win-win situation

EOTs offer a multitude of benefits for both employees and shareholders.

For shareholders:

• Tax advantages: Selling shares to an EOT can offer significant tax benefits for shareholders. In the UK, the 20% capital gains tax is effectively eliminated.

• Sale process advantages: A quick, friendly, non-competitive, non-adversarial sale at a fair price

• Enhanced company performance: Studies have shown that employee-owned companies tend to outperform their non-employee-owned counterparts in terms of profitability, productivity, and innovation.

• Attracting and retaining talent: Companies with EOTs often find it easier to attract and retain top talent due to the unique ownership structure and its associated benefits.

For employees:

• Enhanced engagement and motivation: Owning a stake, albeit a virtual one, in the company fosters a sense of belonging and responsibility. Employees become more invested in the success of the business, leading to increased engagement, productivity, profitability and innovation.

• Shared profits and wealth creation: EOTs can distribute profits in various ways, like bonuses, dividends, or increased pension contributions, or other employee benefits like private healthcare, for example. This translates to direct financial benefits for employees, aligning their interests with the company’s performance.

• Improved decision-making and transparency: EOTs often involve employee representation on boards or committees, giving employees a voice in decision-making. This fosters a culture of transparency and trust, leading to better-informed choices.

• Enhanced job security and succession planning: Employee ownership can make companies more resilient and adaptable, potentially leading to increased job security. Additionally, EOTs offer a smooth succession plan for exiting shareholders, ensuring business continuity.

The EOT process: From concept to reality

1. Planning and preparation:

• Gather stakeholders: Get buy-in from shareholders (and as appropriate, key employees). Agree a high-level vision for the future of the company under an EOT.

• Legal and financial advice: Secure experienced professional guidance on tax breaks and structure.

• Valuation: Hire independent experts to determine company value for share purchase.

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Funding: Plan how the EOT will pay for the shares (typically bank loans or deferred payments out of future profitability).

2. EOT establishment:

• Seek HMRC clearance: Get official approval for tax relief benefits.

• Draft Trust deed: Define rights, responsibilities, and distribution of benefits.

• Appoint Trustees usually initially made up of employee representatives, existing shareholders and an independent trustee.

3. Share purchase:

• Negotiate share price: Agree on a fair and sustainable purchase price.

• Execute share purchase agreement: Formalise the transfer of shares to the EOT.

4. Ongoing governance:

• Employee communication: Ensure all staff understand the EOT structure and benefits.

• Board representation: Consider employee representatives on the company board and EOT.

• Performance monitoring: Track progress and adapt the EOT based on company growth.

5. Long-term commitment:

• Maintain controlling interest: The EOT must hold over 50% of shares for tax benefits.

• Employee engagement: Foster a culture of shared ownership and responsibility.

• Exit strategy: Plan for future scenarios involving the EOT and its shares.

This is a simplified overview. Remember, seeking professional advice is crucial for a successful EOT implementation.

Who holds the keys? The role of trustees

EOTs operate under the guidance of a separate board of trustees who serve as independent advocates for the employee shareholders. Unlike the company’s regular board of directors, their primary focus is to ensure the company’s leadership consistently prioritises the collective well-being of employees. While not managing the company directly, the trustees possess oversight and intervention powers should the company’s actions deviate from this employee-centric objective. Ideally, the Board of Trustees should have a balanced composition representing different voices, typically covering employees, management and an independent voice. They are responsible for safeguarding employee interests and providing oversight to the strategy and financial health of the trading business.

EOTs: A model for the future

Employee ownership trusts are more than just a financial structure; they represent a shift in the traditional power dynamics of businesses. By empowering employees and aligning their interests with the company’s success, EOTs hold the potential to create a more engaged, productive, and sustainable business landscape. As awareness and understanding of this model grows, we expect to see more companies embracing employee ownership, paving the way for a future where employees are not just workers, but valued stakeholders in the shared journey of success.

If you would like further information or advice on setting up an Employee Ownership Trust for your business, please get in touch with us on 01293
227670 or visit www.carpenterbox.com