How do you want to leave your business?
What do you want for your business? What is your succession plan?
When asked about succession ambitions, 38% of you said you hope to sell to another broker, and 29% believe a management buy-out (MBO) is on the cards.
What if you could leave and continue to benefit from the future profits of a business you no longer own?
Chris Budd founded a financial planning business in 2000. 18 years later, he sold it to an Employee Ownership Trust (EOT). Today, he runs The Eternal Business supporting business owners with their EOT pathways…
What is The Employee Ownership Trust (EOT)?
The EOT is an HMRC approved scheme, which was introduced in 2014. In a nutshell, the EOT owns the shares, and the beneficiaries of the trust are the employees. It is very similar to the John Lewis method of ownership.
Crucially, the employees do not own shares directly. This means that they do not have to commit any money or put up their houses as security. The trust owns the shares on their behalf, and therefore they have control of the business, and receive the profits, without having to take the risk associated normally associated with an MBO.
How does it work?
- First the company sets up its own EOT. This requires HMRC prior approval
- The owners then sell their shares into the new established EOT
- The EOT doesn’t have any money, so a debt is created to the owner
- The future profit of the business goes to the EOT as the shareholder. This is used to repay the debt to the owner, with any extra available for the employees
- Once the debt is repaid, all the profit is available for the employees
What’s the benefit?
For many, the ideal exit involves receiving market value for the business, protecting its legacy and doing the best for the employees and clients.
In order to get HMRC approval to set up the EOT, the scheme must follow a number of rules. For example, the value paid is capped to the amount set by an independent market valuation, and the number of shares sold must be a controlling interest.
And so, we get the ideal exit: the owner gets a fair market value, the company continues, leaving a legacy, the employees are looked after, and clients continue to be dealt with.
Also, the Government are big fans of the idea of employee ownership and have provided tax incentives. The payments to the owner are capital gains tax exempt, and payments to employees are free of income tax up to £3,600 p.a.
You still need to prepare for a sale
This dream scenario for business owners does come with a caveat. Remember I stressed earlier that, in some way or another, payments for the sale of the business come from future profits? Well the sale to the EOT is no different. This means that:
- The future payments to the owner will come from profit which is generated by a company that they no longer control.
- The EOT, like any sale, is an exit route. This means owners must spend time getting the business ready so that it will one day carry on without them.
- Preparing the leadership team, creating engaged employees, allowing the employees a voice in decision making; clarity over purpose. These are all crucial elements in preparing a business for any sale, including sale to an EOT.
Want to know more?
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