Setting up an EOT or Employee Ownership Trust can offer a win-win scenario for business owners and employees. EOTs achieve this by bringing a range of benefits, including enhanced employee engagement, performance improvements and favorable tax considerations. In this guide, we explore what an EOT is and its benefits and provide a step-by-step plan to get your EOT up and running.
Understanding the basics of an EOT
An EOT is a business ownership model where employees own a stake in the company they work for, introduced by the UK’s Finance Act 2014. This is designed to provide a structured way for employees to have a say in the running of the business, which can bring a variety of benefits for employers, too. These include enhanced employee morale and motivation, as employees are more invested in the success of the company. Additionally, for business owners, there are various tax benefits including relief from Capital Gains Tax when selling shares to the EOT.
When compared with traditional ownership models like sole traders, partnerships and corporations, EOTs offer unique benefits like distributed risk and shared success, making it a viable alternative for many businesses. Currently, around 1,300 UK businesses have gone this route, doubling the figure from 2020.
Factors to think about before setting up an EOT
Most types of businesses can set up an EOT, provided they have a minimum number of employees and a viable financial model. However, it is important to note that an EOT is not a one-size-fits-all, and there are several points to consider when deciding whether to go down the route of an EOT:
- Choosing the right trustee: pick someone who knows your business well and can make informed decisions.
- Setting governance rules: clearly and formally lay out what the trustee and the board of directors are responsible for.
- Financing the purchase: usually, the company will be responsible for the purchase, but it will depend on your unique circumstances. Assess what that means for your cash flow.
- Getting employees on board: open communication is key to making employees enthusiastic stakeholders.
- Mapping your exit: consider your own financial needs as the sale might be paid over years from the company profits.
- Legal compliance: setting up an EOT involves several legal steps. Professional advice can help you navigate them.
How to set up an EOT
Setting up an EOT involves a series of carefully coordinated steps. Here’s a general guide to help you understand what is typically involved in the process:
Step 1: Feasibility check
Begin by evaluating your company’s current financial health. This includes assessing assets, liabilities and overall profitability. A healthy balance sheet makes your business a better candidate for an EOT. Employee engagement is also vital for the success of an EOT. Conduct surveys or focus group discussions to gauge the general mood and openness of the staff toward this new ownership structure. Finally, examine your company’s long-term plans to ensure they align with an EOT structure. Would the sharing of profits and responsibilities complement your future growth?
Step 2: Valuation
Hiring an impartial valuer ensures the valuation process is fair and free from bias. This valuation will serve as the basis for the share price. While setting the price, consider:
- Market conditions
- Company assets
- Projected earnings
- Any other relevant financial metrics
Step 3: Draft a trust deed
You will need to draft a trust deed – an overruling document to define the trust’s operating terms, how it will interact with the company and how it will be governed. The deed should include explicit terms on how profits will be distributed among employees and how governance decisions will be made.
Step 4: Appoint the trustee
The trustee must be well-versed in your business domain and possess the skills to make well-informed decisions. This could be a person, a board of people, or even an independent trustee company. Once chosen, the trustee must be formally appointed following the guidelines set forth in the trust deed.
Step 5: Set governance structures
While the company will retain its own board of directors, there should be a distinct set of governance structures for the EOT. The trustee may need to attend board meetings or be involved in certain strategic decisions, especially those that impact the workforce. Clearly outline these responsibilities.
Step 6: Arrange finances and the purchase agreement
Typically, the company itself will finance the purchase of shares by the EOT. This is often referred to as a ‘vendor loan.’ This legal document will outline the terms of the loan, including interest rates, repayment schedules, and what happens in case of default.
Step 7: Transfer the shares
You will need to go through the proper channels to legally transfer ownership of the shares to the EOT, requiring the guidance and assistance of a solicitor to make sure all boxes are ticked. Once the shares are transferred, new share certificates will be issued in the name of the trust.
Step 8: Finalise the payment
Payment for the shares is usually spread out over several years and comes out of the company’s profits. Agree on this schedule and include it in formal documentation. It is essential to understand that the EOT will continue to make payments until the full agreed sum is paid off. This could affect the company’s short-term cash flow, so plan accordingly.
Time Needed for Setting Up an EOT
Setting up an EOT is not an overnight task; it requires thorough planning, execution, and review. Understanding the time it takes is important to make sure your planning is accurate and realistic.
You should plan for a minimum of three to six months to fully establish an EOT. However, this is a general estimate; the actual time can vary depending on the specifics of your business, the complexity of its financial elements and the level of readiness and engagement from all stakeholders involved.
Before making any significant decisions, you should seek legal advice from experts in EOTs and business law. A solicitor will be able to guide you through the entire process, helping you to navigate the complexities and avoid mistakes that could be time-consuming and costly.
Post-setup considerations
After the EOT is set up, the day-to-day operations of the business may require adjustments. Employees may take on new roles, and governance structures might be changed. Regular reviews and performance assessments are vital to ensure the EOT is serving its intended purpose effectively. These may be the responsibilities of managers, trustees, or other employers.
