Transfer of ownership to employees increased 200% from 2019 to 2021
According to figures obtained from HMRC, the number of businesses transferring ownership to employees through Employee Ownership Trusts saw a sharp rise from 127 in 2019 to 384 in 2021.
The number of new Employee Ownership Trusts (EOTs) have jumped 800% from just 41 in 2019.
Employee Ownership Trusts are becoming increasingly popular amongst entrepreneurs looking to exit their business. EOTs enable owners to sell their shares to employees via a trust company, normally for full market value. In doing so, they do not incur income, capital gains or inheritance tax liabilities on the disposal. The model was set up by the Government in 2014 to encourage greater employee ownership of businesses.
One common misconception about EOTs is that businesses are typically undervalued, meaning that owners will get less than they would when selling to an external buyer. In fact, the sale price for the shares is their market value.
EOTs particularly suit owners who want to step away from their business gradually. Typically they will receive a sum of money from the sale of their shares upfront, with the remainder paid from profits from the business over the next few years.
The benefits of EOTs are considerable. As well as the tax advantages, there is less need for lengthy due diligence processes that would be necessary when selling to an external party. The risk of a deal collapsing due to disagreements between vendor and purchaser is also much reduced. Establishing an EOT is generally a more cost effective way of selling a business, as advisory fees tend to be lower.
This threefold increase in New Employee Ownership Trusts would seem to indicate that owners are increasingly waking up to the advantages of this model, including allowing for an advantageous exit and benefitting the very people who helped create the value in the business in the first place, the employees.
While not without their challenges, for example the owners may not get all of the purchase price up front, EOTs can be a great option for entrepreneurs who want to attract and retain talent to help their business thrive during the transition and after they step away. Studies have shown businesses operating through EOTs are associated with high levels of productivity and engagement amongst employees*.
Companies that have adopted this ownership model include the home entertainment retailer, Richer Sounds and organic vegetable delivery box, Riverford Organic Farmers and publisher, the Folio Society.
New Employee Ownership Trusts established jumped 200% to reach five-year high
*Employee Stock Ownership Plan survey, Deloitte
Charlie Hewlett and Hugo Brown are Corporate Lawyers at Boodle Hatfield.