BY CHRIS BUDD AND NEIL SMITH
Employee ownership trusts In Equilibrium’s recent live online event series on business exit options, employee ownership trust specialists Chris Budd and Neil Smith explored the increasingly popular exit strategy We have already seen entrepreneurs’ relief slashed. We also now have the prospect of capital gains tax rising in line with income tax which is leading many people to reconsider employee ownership trusts (EOTs) due to their entirely tax-free structure. Add to that the increasing focus on ‘doing business better’, and it’s no wonder that EOTs are rapidly becoming a mainstream business exit option.
Chris Budd Author of ‘The Eternal Business’ and Founder of the Eternal Business Consultancy Selling to an EOT is an excellent exit route for most business owners. It involves selling the shares to a trust fund, at a market valuation. The EOT pays for the purchase out of cash and future profits. Once the owner is paid off, the profit is distributed among the employees. Unlike a trade sale, the EOT route means that the business continues, leaving a legacy for the owner. The risk comes, however, in the fact that the business needs to continue generating a profit in order to pay the owner. This might seem like additional risk, however all business acquisitions are effectively paid for out of the future profits in one way or another. By selling to the EOT, the owner has the chance to prepare the business for the sale. In this way, they can work on the transition before the transaction. This therefore provides us with a clue as to which type of businesses are best suited to sale to an EOT – those where the owner has time – a year or two at least – to work on the transition. That’s not to say a business selling now must discount the EOT, but this will involve a higher degree of risk. Indeed, the owners should ensure that the business gets specialist EOT advice after the transition following the sale. There are other issues that may appear to work against an EOT, such as key employees with their own intentions of buying, however these can all be worked out as part of the transition process. If you would like to discuss whether the EOT might be right for your business, or if you work for a business who recently sold to an EOT and you would like support, you can get in touch with me at chris@theeternalbusiness.com.
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