Establishing an Employee Ownership Trust for Your Business: A Comprehensive Guide

Over the past decade, Employee Ownership Trusts (EOTs) have grown to become a defining feature in the wider business landscape, with their adoption rate steadily increasing since their inception in 2014. Companies have welcomed this progressive model of shared ownership, which empowers employees with a greater influence and stake in the business’s future.

Transitioning to the EOT model can be a daunting prospect if your business is unversed in the process. Much like any other significant strategic shift in business, a transition to an EOT demands meticulous planning to guarantee the company’s newly selected structure aligns with its intended objectives.

In this guide, Ramsdens Solicitors take you through each step involved in setting up an EOT. We’ll shine a spotlight on all the critical elements you will need to consider to ensure a seamless and successful transition.

What is an Employee Ownership Trust?

The UK’s Finance Act 2014 introduced EOTs as a collective ownership arrangement. In this setup, company shares are entrusted to one or more trustees for the employees’ benefit, providing them with a financial stake in the company’s success. While the board of directors continues to handle day-to-day management, of the business, all employees gain a financial interest in the company’s future success, as long as they remain with the organisation.

Since their introduction, EOTs have enjoyed increasingly widespread acceptance. By December 2022, the UK had approximately 1,300 employee-owned firms. This number more than doubled post-2020.

The numerous benefits associated with this model of ownership contribute to its popularity, including:

• Enhanced productivity: shared ownership can bolster employee engagement, thus boosting productivity levels and overall company performance.
• Increased employee retention: by offering employees a share in the company, EOTs can augment job satisfaction, promote talent retention, and make the company a more appealing workplace for potential employees.
• Significant tax benefits: for business owners, a sale to an EOT could offer a completely tax-free exit strategy. Meanwhile, employees can receive tax-free bonuses of up to £3,600 per annum.
• Smooth succession planning: EOTs enable business owners to plan their exit without the usual stress of a conventional sales process, placing the organisation into their workforce’s hands.

What Should You Consider Before Establishing an EOT?

Prior to deciding on establishing an EOT, it is crucial to consider the best method of making the transition. Are you sure the move is viable and suits your business’s specific needs? Factors to consider include:

• Selection of a suitable trustee: any potential trustee (or its directors) must be able to understand the business and make informed decisions. They also need the ability to foresee and manage possible conflicts of interest.
• Choice of a governance structure: your must distinguished between the trustee’s responsibilities and those of the board of directors managing the business.
• Financing the purchase: most EOT purchases are funded by the company itself. You must consider how this funding will affect the company’s cash flow and its financial health in the short and long term.
• Employee engagement: as EOTs are designed for the employees’ benefit, their acceptance and willingness to participate in the EOT are essential considerations. Open and clear communication is crucial for securing employee commitment.
• Planning an exit strategy: if you are a business owner planning to set up an EOT, your exit strategy must be carefully planned. While selling to an EOT provides a tax-efficient exit, the purchase price is often paid over several years from company profits, and it must align with your personal financial planning.
• Legal and regulatory compliance: establishing an EOT involves navigating various legal and regulatory challenges. Ensuring compliance will require meticulous planning and possibly professional legal and accountancy advice.

These considerations underline the intricacies involved in setting up an EOT and stress the importance of seeking professional advice when starting the process.

What Are the Principal Steps in Establishing an EOT?

Once you have considered the preliminary factors, your company can proceed with establishing the EOT, which involves the following steps:

• Feasibility assessment: this step includes a thorough review of your business’s financial performance, culture, and future business plan. It also examines whether your workforce is likely to support such a transition, as employee engagement is vital for the success of an EOT.
• Valuation: once you have determined that an EOT is a feasible option, you need to establish a fair market value for your business. This typically involves engaging an independent valuer. The valuation will establish the price at which the shares will be sold to the EOT.
• Trust deed: the next step involves drafting a trust deed, a legal document that establishes the EOT and outlines its operation. The trust deed stipulates the trust’s terms and conditions, the appointment of the trustee, and the trustee’s rights and duties.
• Trustee appointment: after establishing the trust deed, the next step is to appoint a trustee. The trustee can be an individual or a group of individuals, a company specifically created to act as the trustee, or a professional trustee company.
• EOT structure and governance: alongside establishing the trust deed and appointing a trustee, you need to set up the governance arrangements. This includes setting up a company board of directors.
• Financing and purchase agreement: the EOT will purchase a controlling interest in the company (at least 50% of the shares). Typically, the company itself will finance the purchase, creating a ‘vendor loan’. A purchase agreement outlining the terms and conditions of this loan will need to be drawn up.
• Share transfer: once the EOT has been established and funds are available, the legal process of transferring the shares to the EOT can begin. This process usually requires a solicitor to ensure legal compliance.
• Settlement of purchase balance: the final step in setting up an EOT is the settlement of the purchase balance. This is the payment of the full purchase price by the EOT to the outgoing owners. Depending on the financing arrangements, this might not occur immediately, but rather be spread out over several years. The EOT will pay back the full total from company profits over time.

Throughout this process, maintaining effective communication with all stakeholders, especially employees, is crucial. They need to understand the implications of the EOT for them and the business to ensure their full involvement throughout the process and beyond.

How Long Does It Take to Establish an EOT?

The timeframe for setting up an EOT depends on the complexity of the business and its financial situation. However, it typically takes between three to six months from the initial assessment to the final legal transfer of shares.

How Can Professional Legal Advice Assist with Establishing an EOT?

Expert legal advice is indispensable to navigate the intricacies of setting up an EOT. Seasoned solicitors can help you evaluate the suitability of an EOT for your business, guide you through the legal and financial complexities, handle potential conflicts of interest, ensure regulatory compliance, and support a seamless transition.

By collaborating with solicitors and taking a thoughtful and thorough approach at each stage of the process, you can optimise the success of your EOT transition, reaping substantial benefits at all levels of the organisation for years to come.