The numerous financial and competitive advantages of selling to an EOT are amplified further in the present economic climate.
The market may see an increase in the popularity of employee ownership trust (EOT) transactions, partly due to the coronavirus outbreak and partly due to the curtailment of entrepreneurs’ relief.
What is an EOT transaction?
EOT transactions were launched by the government in 2014 to encourage employee ownership. The model involves the existing shareholders (usually the founders) achieving an exit by disposing of at least 51% of the company’s share capital to an employee ownership trust. The advantages (over and above a trade/PE sale) include:
- the proceeds of sale are completely free of capital gains tax and inheritance tax. This is particularly attractive now that the lifetime limit on entrepreneurs’ relief has been reduced to £1m;
- protecting employees;
- avoiding having to sell-out to a competitor;
- the ability to manufacture a quick and relatively straightforward exit route, in circumstances where trade sales may be more difficult to achieve than usual and PE activity is reduced.
Perhaps the only real downside is that the sellers are likely to have to take their consideration on deferred terms.
The sale to the EOT takes place on arm’s length terms, with some or all of the consideration being deferred. The consideration is funded either by debt finance provided to the EOT and/or by distributions of profit made by the trading company up to the EOT over time. In other words, the business generates enough cash, typically over five years, to pay for itself.